Title: Seize the Opportunity: Invest in These Two Thriving Growth Stocks Now
Following a promising start in January, the S&P 500 has witnessed a downturn since February, dropping 12.5% over the past year. In this market climate, it's a prudent moment to scrutinize stocks with promising long-term growth potential. Two such contenders are data center equipment provider Vertiv (-1.05%) and tech titan Alphabet (-0.67% for GOOG, -0.79% for GOOGL).
Vertiv: Balancing Risk and Reward
Vertiv's stock value appears noteworthy based on management's full-year 2023 outlook. This includes projected 14% to 17% organic revenue growth, an estimated adjusted free cash flow (FCF) of $300 million to $400 million, with adjusted diluted EPS of $1.17 to $1.27. This midpoint prediction places Vertiv on a forward P/FCF multiple of approximately 14 times and a P/E multiple of less than 11 times, portraying a potential bargain.
Despite its allure, Vertiv's reasonably cheap stock price can be attributed to its Q4 FCF missing guidance by a considerable margin. Although management anticipated a year-over-year Q4 FCF improvement of $242 million to $292 million, the actual increase was a more modest $135 million. This has given rise to concerns about delayed collections and potential order cancellations in 2023.
Investors will closely observe Vertiv's first-quarter FCF and working capital figures, particularly as management anticipates an adjusted outflow of $75 million and a working capital improvement of $15 million. If the company delivers on these estimates and maintains its full-year guidance, expectations of a substantial stock price surge seem plausible.
Two hallmarks of optimism include the positive forecasts from peers regarding the end-market for data center spending in 2023, and the increasing occupancy and utilization rates reported by prominent data center companies like Equinix and Digital Realty Trust.
Alphabet: Unlocking Cash Flow
Vertiv operates in the colocation data center market, which includes companies like Equinix and Digital Realty. It also penetrates the growth sectors like cloud and hyper-scale markets, involving industry giants like Microsoft's Azure and Amazon Web Services, as well as Google Cloud.
Google Cloud's impressive Q4 growth (32% year-over-year revenue increase to $7.3 billion) emphasizes the significance of Alphabet stock. Although this business remains in the red, its recurring revenue and cash flow model promise to bring significant financial contributions to the company in the future.
Meanwhile, Google's core search business continues to thrive as a substantial cash generator. While advertising revenue dipped by 2% to $42.6 billion in Q4 2022, it's pertinent to note that this sector actually exhibited moderate underlying growth, according to CFO Ruth Porat. Conversely, declining consumer spending invariably leads advertisers to curtail advertising expenses – a trend set to reverse when interest rates eventually cease to rise.
Wall Street analysts estimate Alphabet's FCF to soar from $60 billion in 2022 to $70.6 billion in 2023, before surpassing $100 billion in 2025. With Alphabet projected to possess $122.5 billion in net cash at the end of 2023, the company's future cash generation and retention potential are remarkable. This surplus can be devoted to growth-enhancing investments and supporting the pursuit of Google Cloud profitability, opening up ample opportunities for upward stock movement.
Given the current market conditions, carefully considering opportunities for investing in stocks with long-term growth potential, such as Vertiv and Alphabet, is a wise decision for financially savvy individuals. Vertiv, with its promising projected revenue growth and estimated cash flow, could present a potential bargain for investors looking to balance risk and reward in their portfolios. On the other hand, Alphabet, with its substantial cash reserves and promising future cash flow projections, offers a different investment opportunity due to its growth-oriented business model and strong performance in areas like Google Cloud and its core search business.
