Growth boosts valuation multiples, but it doesn’t always last forever. Companies that cannot maintain it are often penalized with large declines in market value, a lesson ingrained in investors who lost money in tech stocks during 2022.
The risks that can come from buying these assets is precisely why we started StockStory - to isolate the long-term winners from the losers so you can invest with confidence. Keeping that in mind, here is one growth stock where the best is yet to come and two climbing an uphill battle.
Two Growth Stocks to Sell:
FOX (FOXA)
One-Year Revenue Growth: +16.6%
Founded in 1915, Fox (NASDAQ: FOXA) is a diversified media company, operating prominent cable news, television broadcasting, and digital media platforms.
Why Do We Pass on FOXA?
- Scale is a double-edged sword because it limits the company’s growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 4.5% for the last two years
- Sales are projected to tank by 2.6% over the next 12 months as demand evaporates
- Projected 4.5 percentage point decline in its free cash flow margin next year reflects the company’s plans to increase its investments to defend its market position
FOX is trading at $59.12 per share, or 13.8x forward P/E. Dive into our free research report to see why there are better opportunities than FOXA.
Somnigroup (SGI)
One-Year Revenue Growth: +23.1%
Established through the merger of Tempur-Pedic and Sealy in 2012, Somnigroup (NYSE: SGI) is a bedding manufacturer known for its innovative memory foam mattresses and sleep products
Why Do We Think Twice About SGI?
- Lackluster 10.1% annual revenue growth over the last two years indicates the company is losing ground to competitors
- Poor free cash flow margin of 9.6% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Diminishing returns on capital suggest its earlier profit pools are drying up
Somnigroup’s stock price of $80.50 implies a valuation ratio of 29.2x forward P/E. Check out our free in-depth research report to learn more about why SGI doesn’t pass our bar.
One Growth Stock to Buy:
Nvidia (NVDA)
One-Year Revenue Growth: +86.2%
Founded in 1993 by Jensen Huang and two former Sun Microsystems engineers, Nvidia (NASDAQ: NVDA) is a leading fabless designer of chips used in gaming, PCs, data centers, automotive, and a variety of end markets.
Why Are We Backing NVDA?
- Annual revenue growth of 140% over the last two years was superb and indicates its market share increased during this cycle
- Performance over the past five years was turbocharged by share buybacks, which enabled its earnings per share to grow faster than its revenue
- Robust free cash flow margin of 48.8% gives it many options for capital deployment, and its rising cash conversion increases its margin of safety
At $181.27 per share, Nvidia trades at 38.5x forward P/E. Is now the time to initiate a position? Find out in our full research report, it’s free.
High-Quality Stocks for All Market Conditions
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