Investment Thesis
It has been a remarkable year for the market in 2021, as it piled on the strong recovery from the COVID-19 market bottom in 2020. Despite that, many high-growth stocks suffered deep value compressions towards the end of the year. But we are not perturbed with the correction. After a stellar run from April 2020, such significant retracement has given opportunities for high-growth stocks to take a breather. It would allow these stocks to consolidate, allowing the market makers to accumulate quietly again before taking them higher subsequently.
Our preference towards growth investing is to consider a balanced approach. Some investors have chosen only the high-growth path, without too much focus on the “big-tech” types of stocks. However, we believe that these stocks are critical to helping reduce overall portfolio volatility. Given their highly competitive moat and strong underlying drivers, they also have a clear long-term uptrend. Therefore, we believe that growth investors should carefully position their portfolio with a good mix of high-growth and big-tech stocks over the long run.
We discuss which are our top ten picks for 2022.
1. Amazon
Amazon (AMZN) stock was a laggard in 2021 as it underperformed the market. However, with 2021 done and dusted, we believe that CEO Andy Jassy & Co. is looking to recalibrate its e-commerce drivers as the company has moved on from tough comps in 2020. Besides that, advertising will continue to be an exciting driver. Between the walled gardens tripoly, AMZN is estimated to make significant share gains over the next three years. In addition, its marketplace advertising business is also unaffected by Apple’s (NASDAQ:AAPL) IDFA changes.
Moreover, AWS continues to power the company’s profitability. The stock is trading at an EV/NTM EBITDA of just 22.7x (3Y mean 22.7x). Our fair value estimates point to a stock that is undervalued.
2. Apple
Apple stock lagged the broad market throughout the year before it overtook in early December and maintained it until the end of 2021. We have consistently held that AAPL stock has an unmistakable long-term uptrend bias. Bearish Apple investors can never understand how its stock can continue its incredible upward momentum. Apple is estimated to release its AR/VR device sometime in CQ4’22. It’s safe to say that Apple has always delivered significant hype over its product launches, matched with excellent execution. Its AR/VR device will likely be its entry point into its metaverse opportunity. We believe that there’s no way that CEO Tim Cook & Co. doesn’t have a metaverse strategy. Its more than 1B installed base of happy iOS users is a formidable asset. Sensor Tower estimates point to a 20.7% CAGR in App Store revenue growth over the next five years. There are so many secular drivers underpinning Apple’s growth story.
3. Alphabet
Alphabet (GOOGL) (GOOG) easily led the way among its big-tech peers in 2021, as it finished the year with a return of 65.3%. The stock had a remarkable run that was never in threat throughout the year as it led from start to finish. Its search advertising business continues to be the most dominant player in the US digital advertising market. It’s also expected to maintain its market leadership over the next few years, even though its share is estimated to fall over time. In addition, YouTube has strengthened its grip in the ad-supported video-on-demand (AVOD) market.
Moreover, Google Cloud under CEO Thomas Kurian is ramping up its software capabilities to take on AWS and Azure (MSFT). Moreover, its stock is also undervalued based on our internal fair value estimates. It’s nowhere trading near its peak valuation at 15.7x NTM EBITDA. As a result, we believe that GOOGL stock will continue to be among the leaders in 2022.
4. Meta Platforms
Meta Platforms (FB) opportunity in the metaverse has been discussed since its name change in October. We have also discussed its metaverse thesis in more detail in our previous articles on FB. It’s safe to say that FB will be one of the most important metaverse stocks over the next decade due to its highly profitable business model. It will continue to power its ambitions and CapEx investments for its metaverse ambitions, which few can and are willing to match. Despite facing headwinds from Apple’s new App Tracking Transparency framework, it has been working hard in overcoming these headwinds. Moreover, advertisers continue to flock to Instagram as its monthly active users (MAU) crossed 2B recently. Given that it’s trading at just 13.7x EBITDA, FB is also undervalued according to our fair value estimates.
5. Tesla
CEO Elon Musk & Co. has had another year to celebrate. Tesla (TSLA) stock ended 2021 with a highly impressive 49.8%, following 2020’s phenomenal return of 696%. Given that the stock is trading at an EV/NTM EBITDA of 69.6x, the stock is certainly not cheap. Nevertheless, its valuation has never really gotten in its way as Tesla flexes its leadership grip in the EV market. Its annualized run rate crossed 1M vehicles in 2021 and is estimated to cross 2M in 2022 (according to Wedbush). In addition, according to consensus estimates, its deliveries in 2022 are also expected to reach 1.3M to 1.4M. With Giga Berlin coming online and Giga Austin expected to join after that, Tesla can now focus Giga Shanghai’s 700K run rate on China’s demand. The initial ramp in its new factories would likely affect Tesla’s automotive gross margins. However, we believe that Tesla has proven its EV manufacturing capability through its software engineering expertise and impressive platform re-use. If there’s one stock that can take EV leadership to new heights in 2022, we believe that TSLA stock will continue to defy skeptics.
6. NVIDIA
NVIDIA (NVDA) has been one of the top performers among its semiconductor peers in 2021. But, calling it a semiconductor stock these days seems to understate the massive scale of the company’s potential. We think the company has already transformed itself into one of the world’s leading full-stack AI tech companies. Coupled with its accelerated computing leadership in its hardware, the company has developed a leading software engine for creators building their virtual worlds in the metaverse. Given the incredible scale of its undertaking, we believe that NVDA has a long and clear runway ahead. Coupled with its undisputed leadership, we are not surprised that its stock looks expensive at 58x NTM EBITDA (3Y mean 43.9x). However, we don’t think it’s significantly overvalued, as some bears bemoaned. We believe NVIDIA’s software revenue stream is still in its early innings.
7. NIO
NIO Inc. (NIO) is one of China’s leading pure-play new electric vehicles (NEV) players. Together with XPeng (XPEV) and Li Auto (LI), the trio is affectionately coined “Wei Xiao-Li” in China, which stands for “NIO XPeng-Li Auto.” The company’s vehicles are primarily targeted at displacing China’s “BBA” segment, which stands for “BMW-Benz-Audi.” There is little doubt that NIO has been making incredible progress as it registered another robust month of December deliveries in China (the world’s No.1 EV market). Moreover, the company has begun to penetrate Europe (the world’s No.2 EV market) and plans to be in 25 countries and regions by 2025. Given that it’s trading at just 6x NTM revenue (compared to Tesla’s 15.5x), we believe that NIO’s growth story is still very much in the early stages.
8. Sea Limited
The stock of the Singapore headquartered Sea Limited (SE) has been under intense heat recently as it fell back to its May lows. What promised to be a spectacular run to cap the year for the stock was obliterated in its November retracement, as its YTD gain fell from 80% to just 12.4% to end 2021. It has indeed been a remarkable fall from grace for the company behind Free Fire, one of the world’s top ten mobile games by gross revenue, according to Sensor Tower. The company also operates Shopee, Southeast Asia’s No.1 e-commerce player by a mile. Coupled with its recent forays into LatAm and Europe, the company has grown incredibly fast. Therefore, we believe that the deep retracement has offered investors another fantastic opportunity to snap up its shares at just 8.7x NTM revenue (3Y mean: 9.9x).
9. Cloudflare
Cloudflare (NET) is one of the most expensive SaaS stocks under our coverage, trading at 50.4x revenue. It went up to as high as 82x in November before the sellers digested its momentum spike. However, we remain very confident of CEO Matthew Prince & Co. The company is pursuing its strategic vision of “Cisco-as-a-Service,” as it sought to disrupt its legacy on-premise peers and cloud-native rivals by offering an integrated networking strategy. NET is still ably led by its two co-founders, and we believe that the company has a massive TAM that’s still largely untapped. We think Cloudflare will be one of the essential tech companies over the next decade.
10. MercadoLibre
LatAm’s leading e-commerce player MercadoLibre (MELI), has also been under fire recently. Political and inflation headwinds have threatened to decouple the stock from its long-term uptrend as investors focused on its valuation. While it’s still trading at a premium valuation of 7.9x NTM revenue, it’s well below its 3Y mean of 11.8x. Moreover, the company is still expected to grow rapidly, moving ahead, not just in e-commerce but notably in its fintech segment. Furthermore, the company is also profitable on a GAAP EBIT basis, as it continues to gain leverage remarkably.
Takeaway
We believe that the year-end retracement in growth stocks in 2021 has set the stage for growth stocks to retake their uptrend momentum in 2022. Near-term headwinds such as supply chain bottlenecks and inflation may threaten to encroach on their valuations. However, we believe these are transitory, and therefore are opportunities for long-term growth investors to add exposure. Please feel free to share your favorite stocks in the comments section below!