The year 2022 ended on a very disappointing note, with U.S. equities posting the worst performance in the past decade. But 2023 might have a much better ending, especially since preliminary data from the Bureau of Economic Analysis shows that the U.S. real gross domestic product rose 4.9% in the third quarter, the fastest rate in the past two years.
Furthermore, the Labor Department’s Bureau of Labor Statistics says the Consumer Price Index (CPI) is up by 3.2% year over year for the 12 months ended in October, slower than the 3.7% jump for the 12 months ended in September.
Strong economic growth and cooling inflation bode well for the U.S. stock market. To date, the S&P 500 has recovered nearly 26.8% from its bear market low in October 2022 and is only 5.4% away from its all-time high of January 2022. Once the benchmark index creates a new all-time high, we could conclusively call it a new bull market.
In this economy, retail investors can consider buying growth stocks that have the potential to rally in an upcoming bull market. Here’s why Advanced Micro Devices (NASDAQ: AMD) and Snowflake (NYSE: SNOW) fit the bill.
Advanced Micro Devices
Chipmaker AMD had mixed results in the third quarter (ended Sept. 30). The company surpassed consensus revenue and earnings estimates, but the weaker-than-anticipated guidance seems to be worrying investors. Despite this, there are still several reasons to like the stock.
First, AMD stands to benefit significantly from solid demand for its third- and fourth-generation EPYC server processors (CPUs). According to Mercury Research, in the third quarter, the company’s unit share in the server CPU market was 23.3%, (up 5.8 percentage points year over year) and its revenue share was 29.4% (up 1.7 percentage points year over year).
In the third quarter, fourth-generation EPYC CPU revenue grew sequentially by over 50% and now accounts for a major portion of the company’s server processor revenue as well as unit shipments.
With the headwinds in cloud-spending optimization normalizing, AMD’s Genoa and Bergamo chips (fourth-generation EPYC processors) continue to be in high demand from hyperscale customers.
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The second reason to like the stock: AMD’s next-generation Instinct MI300 GPUs, optimized for AI workloads in the cloud, can be a major growth catalyst for the company. Launched in June 2023, this chip competes directly with Nvidia’s H100 chip in the generative AI market. MI300 chips can be cheaper than Nvidia chips, especially attractive when the supply of AI chips is far below the demand.
And lastly, a third reason to like AMD is that after a sharp slowdown in 2022 and the first half of 2023, the PC industry seems to be finally on the path to recovery. In the third quarter, the company’s client segment reported revenue of $1.5 billion, up 50% sequentially and 47% year over year. Furthermore, management also expects that increased demand for AI-capable PCs and a Windows refresh cycle will drive PC demand from 2024. This can be a major tailwind for its Ryzen 7000 series CPUs and Radeon GPUs.
These tailwinds could make AMD a compelling buy ahead of the upcoming bull rally.
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Snowflake
Data warehousing company Snowflake helps clients to break data silos (structured and unstructured data, stored locally or in the cloud) by consolidating diverse data sets from multiple systems onto a unified platform. Clients can then use the company’s platform to analyze the pooled data and uncover insights for informed decision making.
With the increasing adoption of artificial intelligence and machine learning in the global economy, the demand for well-curated, optimized, and secure enterprise data has also gone up. High-quality proprietary data produces improved outcomes from AI models, which in turn helps the models learn better and create even more-relevant data streams.
Snowflake’s data platform is also highly scalable and operates with all major cloud data providers, such as Amazon’s AWS, Alphabet’s Google Cloud, and Microsoft’s Azure. The company’s data marketplace enables clients to share data securely, allowing AI models access to broad and richer data sets. Hence, the company is playing a pivotal role in its clients’ AI strategies.
In the second quarter of fiscal 2024 (ended July 31), Snowflake demonstrated remarkable resilience and growth, with an impressive 25% year-over-year increase in its customer count to 8,537. Revenue grew by 37% year over year to $640.2 million, while adjusted net income rose from $5 million in the prior year to an impressive $81 million.
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Analysts now expect Snowflake’s revenue to grow year over year by 33.3% to $2.75 billion and adjusted earnings per share (EPS) to grow 179% year over year to $0.70 in fiscal 2024 (ending Jan. 31).
Snowflake currently trades at a price-to-sales ratio of 22.4, far more than the software industry’s median multiple of 2.2. But considering that analysts expect the company’s revenue to enjoy a compound annual growth rate of 35.4% in the next five years, the valuation seems reasonable — making it a sensible buy for retail investors seeking a high-growth stock.
