Companies with steady growth visibility and free cash flow upside in the coming years
- These are the growth stocks to buy for potential upside even amidst challenging market conditions.
- Pinterest (PINS): Steady monthly active users and continued improvement in average revenue per user.
- Li Auto (LI): Multiple mode launches will boost deliveries growth in 2023.
- Lithium Americas (LAC): High quality assets in the U.S. and Argentina to unlock value once mining commences.
The markets had something to cheer about as inflationary pressure eased on a relative basis in October. However, uncertainties will continue to dominate the headlines and market trends. A recession seems inevitable in 2023, with geopolitics, energy prices, and inflation continuing to play a spoilsport.
From an investment perspective, I would still be very selective and remain overweight on blue-chip stocks. However, with deep corrections, there are a bunch of growth stocks to buy. It makes sense to go shopping with funds locked in the markets for the next 12 to 24 months.
Even in the growth stocks space, there are some high-risk ideas and relatively low-risk bets. For example, Marathon Digital (NASDAQ:MARA) is a Bitcoin (BTC-USD) miner. The stock can be a multibagger if Bitcoin reverses. If not, the outlook is gloomy.
Other growth stocks represent companies where the industry outlook is stable. These growth stocks have plunged due to a downward revision in earnings estimates. However, the business model is sound with positive long-term industry tailwinds.
Let’s look at these growth stocks to buy for long-term value creation.
Pinterest (NYSE:PINS) stock witnessed a major correction as user growth stalled after the pandemic. However, the factor is discounted in the stock, and several positives can trigger a rally for PINS stock.
The first good news is that the company’s monthly active users were flat on a year-on-year basis for Q3 2022. User decline was a concern, and this metric seems to improve gradually from current levels.
Another positive is that even with stable monthly active users, Pinterest reported 8% revenue growth on a year-on-year basis. The reason is the upside in average revenue per user. The ARPU in the U.S. bottomed out in Q1 and has been improving. ARPU is still significantly low in the rest of the world (excluding the U.S. and Europe), with ample headroom for an upside.
The company’s research and development expense has been approximately 24% of revenue in the last three quarters. Investments are focused on making the platform shopping-friendly and boosting advertising revenue. With these positives, I am bullish on PINS stock, and the recent uptrend is likely to sustain.
Li Auto (LI)
Among Chinese electric vehicle stocks, Li Auto (NASDAQ:LI) seems poised for a big move from current levels.
From a financial perspective, there are two reasons to like Li Auto. First and foremost, the company has a cash buffer of $8 billion. This will allow for aggressive retail expansion in China besides investment in product development. Furthermore, Li Auto has consistently reported positive free cash flows.
New car models accelerating delivery growth in 2023 is another reason to be bullish. The company’s second model, Li L9, has already witnessed healthy booking. Further, in September, the company unveiled Li L8, a six-seat SUV. Additionally, Li L7, a five-seat SUV, will also be launched. These new cars will accelerate delivery growth and boost free cash flows.
It also seems likely that Li Auto will follow the path of Chinese EV peers and expand in Europe. A strong balance sheet will support expansion beyond China.
Lithium Americas (LAC)
With demand for lithium likely to remain strong, Lithium Americas (NYSE:LAC) is among the quality growth stocks to buy.
Estimates indicate that by 2035, the global lithium supply gap will be acute – At least 1.1 million metric tons or 24% lower than the demand. Clearly, the correction in lithium mining stocks presents a good entry opportunity.
As an overview, Lithium Americas has high-quality assets in the United States and Argentina. The assets have a long mine life and provide clear cash flow visibility once production commences. Just to put things into perspective, the Thacker Pass project has an annual EBITDA visibility of $520 million (both phases combined).
Recently, the company announced a split into two lithium companies. Lithium International will focus on assets in Argentina. Lithium Americas will be focused on North America. This decision is likely to unlock value in the coming years.
LAC stock is, therefore, worth buying. Once sentiments turn bullish for the EV investment theme, the stock is poised for a big rally.
This post originally appeared at InvestorPlace.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.