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It has been a bruising 18 months for many growth stocks. With higher interest rates making it harder for many young companies to access funding, proven business models can count for a lot.
But the market turbulence has also opened up buying opportunities for long-term investors.
Here are two growth stocks on my buy list. One I would happily buy at its current price if I had spare cash to invest. I would like to buy the other one too, but only if I can get it cheaper than is the case now.
I was excited to buy shares in online travel specialist Tripadvisor (NASDAQ: TRIP) a few months ago. Since then though, they have gone down in value. I see that as a buying opportunity for my portfolio.
Last week’s release of first quarter results did not go down well with investors.
Revenue rose 42% year on year. But costs rose too, with total operating expenses up 37% compared to the same period in the prior year. The company reported a net loss for the period of $73m, more than twice as large as the same quarter last year.
Looking at cash flow
With that sort of result, why am I excited about Tripadvisor? I think its strong brand and unique customer proposition are valuable assets at a time of surging travel demand.
I also think the earnings numbers do not tell the whole picture when it comes to business performance. Free cash flow in the first quarter was $119m. On an annualised basis, that suggests free cash flow could be close to half a billion dollars. The company is sitting on cash and cash equivalents of $1.1bn. Yet its market capitalisation is only twice that, at $2.2bn.
That looks like a cheap valuation to me.
I think Tripadvisor could be a free cash flow machine in coming years as long as it keeps a lid on costs. A weak economy could burst the travel bubble, hurting revenues and profits. But, in the long term, I think travel demand should be significant. Tripadvisor should benefit.
Medical robotics maker Intuitive Surgical (NASDAQ: ISRG) has an excellent business model.
It operates in a field with robust demand: surgery. By helping to automate processes, it can offer deep-pocketed healthcare providers with cost and consistency benefits.
As well as selling machines, lucrative revenues can come from peripherals such as surgical instrument attachments that are replaced after each operation.
I think competition will increase, possibly hurting profit margins. But with patented technology, a large installed base of machines and a unique library of past operations for training purposes, I think Intuitive has a strong competitive advantage.
This is exactly the sort of growth stock I would be happy to own in my portfolio – if I could buy it at an attractive price. With a price-to-earnings ratio of 82 however, the shares just look too expensive for my tastes.
So for now, although it is on my long-term buy list, I will not be making a move on Intuitive until the share price becomes significantly cheaper.