On Aug. 25, Federal Reserve Chair Jerome Powell said that interest rates will continue to rise if the economy doesn’t cool. However, with core consumer inflation rising again - largely due to oil prices - many investors are worried once again that the Fed will stay hawkish on policy. Growth-oriented stocks tend to be especially sensitive to the prospect of rising interest rates, because they are valued for profits well into the future - making them less attractive investments in the face of rising Treasury yields.
In times of economic uncertainty, it’s best to buy growth stocks with significant competitive advantages. As sentiment on the stock market sours, we could potentially find leading large-cap growth stocks such as Tesla (TSLA) and Amazon (AMZN) trading at a discount in the near future.
Tesla
On Sept. 11, Tesla received an upgrade to overweight from Morgan Stanley's Adam Jonas, along with a significant 60% increase in its price target. The upgrade was based on the assessment that Tesla's Full-Self Driving (FSD) supercomputer, known as Dojo, has the potential to enhance the company's value by up to $500 billion.
The analyst's upwardly revised TSLA price target of $400 represents a new high-water mark on the Street - highlighting the crucial role that Tesla's Dojo supercomputer could play in boosting the company's valuation. Most analysts are less optimistic; the average 12-month price target of $242.42 represents a discount to the stock's current price, and the consensus rating among 26 brokerage firms in coverage is a hold.
This upgrade from Morgan Stanley followed a period of post-earnings volatility for Tesla stock following its second-quarter results, where investors closely eyed a contraction in margins amid the ongoing electric vehicle (EV) price war. In the second quarter, Tesla reported a 20% increase in profits, reaching 91 cents per share, and a 47% rise in revenue to $24.93 billion, surpassing analysts' expectations. However, gross margins, particularly in the auto segment, fell short of targets.
Despite the recent challenges, Tesla continues to compete aggressively by launching an updated version of the Model 3 in China, and preparing for the first round of Cybertruck deliveries. Tesla's announcement of the long-awaited Semi truck has also garnered attention, with the vehicles already in use as part of PepsiCo's (PEP) corporate fleet.
Meanwhile, CEO Elon Musk's involvement in other ventures, such as Twitter, has raised concerns among investors. However, his hiring of a new CEO for X Corp. (formerly Twitter) alleviated some of those concerns.
Despite some regulatory scrutiny and competitive challenges, Tesla stock is showing signs of resilience, with a new base forming and a proper buy point identified. Tesla is a good long term investment, and is worth picking up if negative sentiment gets out of control.
Amazon
Amazon's stock has surged over 71% YTD; however, it still remains 23% below its all-time high, set in July 2021. Now, the stock's price-to-sales ratio of 2.62 is about 15% below its own five-year historical average.
Operationally, Amazon boasts a wide economic moat. Its online marketplace, responsible for nearly 40% of all U.S. e-commerce sales, benefits from network effects, attracting both merchants and consumers. With its vast global customer base and traffic exceeding 2.8 billion visitors in a single month, Amazon's platform grows more valuable as it expands.
Moreover, the company's scale and dominance enable it to amass significant data resources - particularly via Amazon Web Services (AWS), which positions it as a leader in the burgeoning field of artificial intelligence (AI). In fact, AWS revenue grew 12% in Q2 2023, outpacing other segments within Amazon and surpassing analysts' expectations.
Amazon's enviable economic moat, data-driven advantages, and potential for AI-driven growth make the stock a compelling long-term investment, and a great stock to pick up if near-term macro concerns knock it down.
Conclusion
Despite the negative noise around monetary policy and the economy, it’s important to recognize that solid companies will perform well in the long term, regardless of short-term obstacles. Investors should keep Tesla and Amazon on close watch at current levels, as they are very sensitive to inflation and the Fed’s policy response right now - and given September's seasonally bearish trend for stocks, there could be opportunities to pick up these shares at a discount very soon.
On the date of publication, Michael Que did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
