Is 2024 a once-in-a-decade chance to get rich with growth stocks?
Record high interest rates have created countless opportunities among growth stocks. Could this be the best one for building long-term wealth? The post Is 2024 a once-in-a-decade chance to get rich with growth stocks? appeared first on The Motley Fool UK.
Following the 2022 stock market correction, US growth stocks were hit the hardest by panic-selling investors. With the threat of rising interest rates putting an end to the era of near-free money, high-growth enterprises, especially in the technology sector, saw their valuations plummet.
Today, interest rates in the UK currently stand at 5.25%. And across the pond, the Federal Reserve has set them at 5.5%. Both are at their highest level in over a decade. And while the Fed and Bank of England have hit the pause on further rate hikes, there’s still a giant question mark over when eventual cuts might start taking place.
As such, both UK and US growth stocks continue to trade at unusually cheap levels. And as every investor knows, buying top-notch stocks at a discounted price is a proven recipe for building long-term wealth.
What do rate cuts mean for growth stocks?
In many cases, high-growth companies don’t typically rely on debt to fund expansion. Instead, they use the momentum of their share price to issue new stock, capitalising on the value of their equity. So why has more expensive debt crushed these valuations?
Without going too far into the weeds, the intrinsic value of a business is equal to the present value of its future cash flows. In other words, a company’s worth is equal to the amount of money it’s expected to make in the future, discounted back to today.
Interest rates directly impact this discount rate. Even a small change can lead to large swings in valuation. Therefore, as interest rates rise, value estimates fall. And since growth stocks already typically trade at lofty price tags, this translates into a rapid decline. That’s why so many US tech businesses saw their stock price plummet by 60%, 70%, and in some cases 80%, in the space of a few months in 2022!
However, the reverse is also true. Should interest rates start to fall, discount rates follow. That means higher valuation estimates leading to a potentially explosive growth in stock prices. That’s why 2024 might be a once-in-a-decade chance to get far richer.
A top stock to consider now?
Simply buying beaten-down enterprises in the hopes of a sudden upward correction isn’t a prudent strategy. After all, firms are unlikely to recover if their underlying fundamentals and long-term potential are lacking. Looking at my own portfolio, Shopfiy (NYSE:SHOP) is once again looking like a tempting pick.
The e-commerce giant powers millions of online storefronts worldwide. And with the firm taking a small fee on each transaction moving through its platform, the shares are set to benefit from both an interest rate cut as well as the return of consumer discretionary spending.
In fact, we’ve already started seeing evidence of the latter. In the group’s latest quarter, gross payments volume reached $45.1bn – a 32% jump versus a year ago. That translated into a free cash flow generation of $446m. And across the whole of 2023, free cash flow reached $905m versus $186m in 2022.
Despite this drastic improvement in its financial performance, Shopify shares continue to trade firmly below levels compared to a few years ago. While this may signal a buying opportunity, this depressed valuation may not be completely unjustified.
Amazon‘s continued expansion within the online retail space has some investors on edge about Shopify’s ability to capture and retain market share. And this intense competition has undoubtedly contributed to the stock’s volatility.
Yet given the scale of the e-commerce market, I think there’s plenty of room for multiple winners. And when paired with Shopify’s relatively low valuation, I believe the stock is primed for impressive long-term growth, especially at current prices.
The post Is 2024 a once-in-a-decade chance to get rich with growth stocks? appeared first on The Motley Fool UK.
Like buying £1 for 51p
This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
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Zaven Boyrazian has positions in Shopify. The Motley Fool UK has recommended Shopify. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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