2 Stellar Growth Stocks Professional Fund Managers Were Buying in Q1
The Nasdaq Compound fell 9% in the first quarter of the year, but that hasn’t stopped professional fund managers from rushing into growth stocks. Jericho Capital Asset Management’s Josh Resnick started a position in You’re here (TSLA 2.38%), immediately making it the second largest position in his portfolio. Similarly, Alex Sacerdote of Whale Rock Capital Management bought 2.2 million shares of Arista Networks (A NET 1.29%)making it the sixth largest position in his portfolio.
Notably, Whale Rock Capital Management and Jericho Capital Asset Management rank among the best performing hedge funds over the past three years. Given the success of Resnick and Sacerdote, is it worth investing in Tesla and Arista Networks today?
Let’s dive into it.
Tesla: Robot taxis and autonomous robots
In the first quarter, Tesla grabbed an industry-leading 15.5% market share in electric car sales, narrowly beating the Chinese automaker BYD. Despite supply chain challenges and high inflation, Tesla managed to produce 305,400 vehicles, up 69% year-over-year, driving revenue up 81% to 18, $8 billion. And the company posted an industry-best operating margin of 19.2%, up from 14.7% in the prior quarter.
Several factors fuel this efficiency, including higher production volume, pricing power, and a significant cost advantage in battery cell production. As a result, earnings soared 633% to $2.86 per diluted share, as Tesla posted its 11th consecutive quarter of profitability on a GAAP (generally accepted accounting principles) basis.
Management expects shipments to grow 50% annually over a multi-year horizon, and Tesla stands to benefit from several catalysts. The company will soon enter new verticals in the automotive industry, as its Cybertruck and Semi are expected to launch next year.
Additionally, production is ramping up at new factories in Texas and Germany. In the long term, this should strengthen operational efficiency by increasing production capacity and localizing European activity, despite the short-term pressure on margins.
Let’s not ignore the elephant in the room: Tesla’s market capitalization currently sits at $721 billion, meaning the company is worth more than the following seven automakers combined. By any traditional measure, the stock looks grossly overvalued. So why did Jericho take such a large stake in Tesla? This could have something to do with its potential expansion into more profitable end markets.
CEO Elon Musk said complete self-driving (FSD) will ultimately be the most important source of profitability for Tesla’s vehicle business. With that in mind, the company has a robo-taxi slated for volume production by 2024, and it plans to launch an autonomous ride service at some point thereafter, entering a market that ARK Invest says , could generate $2 trillion in annual profits by 2030.
Diving even deeper into science fiction, Musk thinks Optimus – an autonomous humanoid robot that could go into production as early as next year – will ultimately be worth more than the automotive sector.
Here’s the bottom line: the investment thesis for this stock is tenuous right now, and given its valuation, the stock could fall much further than it has already. That being said, I am a Tesla shareholder and have no intention of selling. If you understand the risks, I think now is the time to buy some shares of this growth stock.
Arista Networks: The technology that powers the cloud
Arista provides the high-performance networking solutions that power cloud, hyperscale, and enterprise data centers. Its portfolio also includes adjacent software for network workflow management, monitoring and security. The company’s networking products have earned a reputation for industry-leading speed and power efficiency, and its technology plays a leading role in the data centers of tech titans like Microsoft and Metaplatforms.
According to management, Arista has disrupted the market with two significant innovations. First, its extensible operating system runs on its entire line of switching and routing hardware, simplifying network management. This unique software product approach sets the company apart from traditional vendors such as Cisco Systems which complicate the management of the network with several different operating systems.
Second, Arista exclusively purchases chips from third parties like Broadcom, rather than designing your own. By doing so, the company can equip its hardware with the latest silicon while focusing its research and development spending on software innovation. Additionally, its approach provides customers with greater flexibility as they can select which semiconductors to include in their switching platforms. In comparison, traditional vendors often use custom chips which result in vendor lock-in, meaning customers have no flexibility and often pay more.
Fueled by these innovations, Arista has delivered impressive financial results on a consistent basis. Revenue climbed 28% to $3.2 billion in the past year, and free cash flow climbed 16% to $904 million. More importantly, the company has gained significant market share from Cisco over the past decade, and shareholders have reason to believe that trend will continue.
Arista is the undisputed leader in switching spectrum broadband, and these high-speed platforms will become more and more necessary in the future. The continued adoption of cloud computing, the explosion of data-intensive applications (such as artificial intelligence), and the growing number of connected devices will all drive a need for faster data center networks. Arista estimates its market opportunity at $35 billion by 2025.
From this point of view, Sacerdote’s decision to invest makes a lot of sense. This growth stock still looks like a smart buy right now.