Macroeconomic uncertainty has set the stock market on a downward trajectory. Tesla (TSLA) and Sea Limited (SE) have seen their share prices plunge 45% and 86%, respectively, and both stocks currently sit near a 52-week low. But certain Wall Street analysts see that as a buying opportunity.
Pierre Ferragu of New Street Research has a price target of $530 per share on Tesla, which implies 167% upside from its 52-week low of $198.59. Similarly, Alicia Yap of Citigroup (C) has a price target of $129 per share on Sea Limited, which implies 202% upside from its 52-week low of $42.71.
Of course, investors should never lean too heavily on near-term price targets. The market is simply too volatile over short periods of time. But patient investors should still consider buying both of these growth stocks.
Here’s why.
1. Tesla: A $10 trillion company in the making
Tesla delivered 343,830 electric vehicles (EVs) in the third quarter, up 42%, but that figure still fell short of the 371,000 vehicles analysts were expecting. That shortfall has some investors worried that demand is fading, but naysayers are overlooking a few important details.
On the earnings call, CEO Elon Musk said Tesla still anticipates growing deliveries by “on average 50% a year as far into the future as we can see.” He also noted that limited logistics capacity played a big role in the recent shortfall, but that Tesla is working to smooth regional builds throughout the quarter to reduce end-of-quarter bottlenecks.
Better yet, Tesla still turned in a solid financial performance. Total revenue soared 56% to $21.5 billion in the third quarter, the company again achieved an industry-leading operating margin, and free cash flow skyrocketed 148% to $3.3 billion. It’s worth mentioning that Tesla achieved that industry-leading operating margin despite the cost-intensive production ramp at its newest Gigafactories in Texas and Germany. That means it should become even more efficient as those facilities reach scale.
Also noteworthy, Musk said 4680 battery cells would be incorporated into a significant portion of vehicles produced in Texas in the coming months. That’s a big deal because Tesla already pays less to build battery packs (the most expensive part of an EV) than any other automaker, but the 4680 will further lower production costs.
However, full self-driving (FSD) is the most exciting opportunity. Ultimately, management believes its FSD platform will be the most important source of profitability for Tesla, as it represents a transition into software and services. The FSD beta software will be available to all drivers in North America this quarter, and Tesla has a robotaxi slated for production in 2024. That robotaxi is an important stepping stone on its path to launching an autonomous ride-hailing service. According to UBS Group, the robotaxi market could surpass $2 trillion annually by 2030.
Presently, Tesla has a market cap of $700 billion, but New Street Research analyst Ferragu thinks that could rise to $10 trillion by 2030 if Tesla achieves its goal of producing 20 million electric cars per year by that time. On that note, investors shouldn’t bank on triple-digit returns in the next year, but with shares trading at 10.2 times sales — roughly in line with the five-year average — this growth stock is still worth buying today.
2. Sea Limited: The e-commerce leader in Southeast Asia
Holding company Sea Limited competes in three growing markets. Its e-commerce business, Shopee, operates the most-visited online marketplace in Southeast Asia. Its fintech business, Sea Money, handles payment processing for sellers on and off Shopee, and it offers financing solutions and mobile wallets. Finally, its video game business, Garena, is the developer of Free Fire, the highest-grossing mobile game in Southeast Asia and Latin America.
Sea Limited struggled a bit in the second quarter as high inflation blunted consumer demand in its gaming business. The company still grew total revenue 29% to $2.9 billion, but its non-GAAP (adjusted) loss widened to $1.03 per diluted share as Shopee and SeaMoney continued to operate at a loss. However, SeaMoney is expected to achieve positive cash flow in 2023, and CEO Forrest Li thinks Shopee and SeaMoney will generate enough cash by 2025 to fund their own growth.
Looking ahead, Sea Limited sits in front of a massive market opportunity, particularly in e-commerce and digital payments. Shopee has expanded into parts of Latin America and Europe, and it currently operates in eight of the 10-fastest-growing e-commerce markets in the world. Moreover, online sales across all relevant geographies will total $446 billion by 2025, according to Statista. Naturally, growth in online shopping should also be a tailwind for SeaMoney. In fact, Bain & Company estimates that digital payment volume in Southeast Asia will approach $1.2 trillion by 2025.
To put those figures in perspective, Shopee facilitated $62.6 billion in online sales last year, while SeaMoney handled just $17.2 billion in total payment volume. In short, Sea Limited has a long runway for future growth, and Citigroup analyst Yap says the current economic headwinds haven’t changed that.
That bullish outlook notwithstanding, investors should not bank on triple-digit gains in the near term. But with shares trading at 2.4 times sales — virtually the cheapest valuation since Sea went public in 2017 — patient investors could still see tremendous returns in the next decade.
— Trevor Jennewine
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Source: The Motley Fool