The New Year seems to have changed investors’ sentiment. After a grueling bear market in 2022, investors are enjoying a better start to this year. And leading the way are the best growth stocks which might have finally turned the corner.
However, the technology industry is still facing plenty of risks. For example, supply chains remain unsettled, interest rates remain high, and the Federal Reserve seems set to hike rates a couple more times before its tightening campaign is completed. So don’t necessarily expect smooth sailing for tech stocks going forward.
But there are finally some signs of optimism in the stock market. And, after the huge selloff we saw in 2022, the valuations of many growth stocks are quite attractive. These seven growth stocks should post superior returns in 2023.
Taiwan Semiconductor Manufacturing (TSM)
Taiwan Semiconductor Manufacturing (NYSE:TSM) stock has rallied sharply over the past quarter. Despite that, its shares are still down more than 35% over the past 12 months.
The sharp decline of TSM stock was especially shocking as Taiwan Sem is one of the world’s most important tech companies. It is far and away the world’s largest contract producer of computer chips and integrated circuits, and the company retains a market capitalization north of $400 billion.
In addition to the general tech malaise, there were specific reasons behind Taiwan Semiconductor’s decline. For one thing, the demand for semiconductors fell in 2022 after booming for an extended period heading into last year. On top of that, political tensions are mounting between Taiwan and China. If China launches a military strike against Taiwan, TSM would face real, potentially catastrophic risk.
That said, Taiwan Semiconductor Manufacturing seems cheap enough to be worth the risk, as its shares are now trading at 15 times analysts’ average forward earnings estimate for the chip maker.
Moreover, the company has started expanding production facilities in Arizona to reduce its geopolitical risk while also taking advantage of subsidies from the CHIPS Act which promotes U.S.-based chip manufacturing.
Datadog (NASDAQ:DDOG) provides cloud monitoring and security functions via software-as-a-service solutions. Datadog’s appeal lies in its all-in-one platform.
In other words, DDOG’s clients can monitor and secure their servers, workflows, databases, and their other IT hardware from one central location. In contrast, traditional solutions are compartmentalized, creating potential blind spots and vulnerabilities. Having all these functions in one place makes it easier for firms’ IT professional to look at everything simultaneously.
Datadog has had tremendous success. Analysts, on average, expect the company’s 2022 sales to come in at $2.2 billion, up from $101 million in 2017. And analysts’ mean estimates call for its top line to increase 33% annually in the coming years.
Datadog isn’t a tremendous profit machine yet, but it is in the black. The fact that it isn’t burning cash is a big advantage as many tech names struggle. Datadog has plenty of time to keep growing its business and become a leader among tech names in the future.
It’s no secret that the credit card companies are incredible businesses. They impose, in effect, a transaction tax on the global economy. As the world grows, Visa (NYSE:V) effortlessly makes more money. But, folks might wonder, doesn’t this growth have to come to an end at some point?
It’s true that Visa’s market will eventually be saturated. But it’s not there yet. Emerging markets offer tremendous opportunities for Visa and its peers to continue converting vendors from cash to credit. In addition, the pandemic caused rapid adoption of touch-free payments solutions which usually require a credit or debit card.
Visa has added, positive drivers for 2023. The return of international travel and tourism coming out of the pandemic has done wonders for Visa, as it charges much higher fees on international transactions which involve multiple currencies.
As if that weren’t enough, the weakening U.S. dollar will now aid Visa as well. Visa reported a significant reduction in its earnings in 2022 thanks to the strengthening of the U.S. dollar. This caused Visa’s revenues from other regions such as Europe to be worth less in dollars.
Now, however, the value of the dollar has dropped 10% over the past quarter, and that will greatly boost Visa’s earnings .
C3.ai (NYSE:AI) is an enterprise-focused, artificial intelligence company. The company’s software platform helps customers design and build AI-powered tools for working with, processing, and visualizing data.
C3.ai has been a disappointing investment since going public, with the shares dropping from a peak of $161 in 2020 to just $13 per share today.
However, 2023 could be the turning point for C3.ai. For one thing, investors’ demand for AI stocks is surging thanks to ChatGPT, an AI-powered tool. The rapid growth in the popularity of ChatGPT has helped awaken interest in AI technologies.
Moreover, C3.ai has a fantastic balance sheet. It has $8 per share of net cash on its balance sheet, meaning that investors are paying just $5 per share for its actual business. Furthermore, the company already has more than $250 million of annual revenues, while its market capitalization is down to $1.3 billion.
C3.ai got off to a slow start as it initially focused on relatively slow-growth industries such as oil and gas. However, C3.ai has started winning big contracts with the Department of Defense, which should set the stage for investors to give this company a higher valuation. That, plus the company’s huge cash balance, makes AI stock a good pick for the rest of the year.
STMicroelectronics (NYSE:STM) is a chip maker The firm is broadly diversified and has exposure to a number of promising fields and applications within the semiconductor industry.
STMicroelectronics develops silicon carbide chips used by power and electronics companies. STM also creates chips that power internet of things products and 3D sensors. STMicroelectronics should prosper from the proliferation of of smart autos, along with increased opportunities in the transportation sector as that space becomes more electrified.
STM stock looks exceptionally cheap at the moment, as the shares are trading for just 11 times both the company’s current and forward earnings. The risk is that chip makers might face a glut, as the sector’s inventories have risen.
That said, STM stock should be a winner over the long haul, given its attractive valuation and the multiple, promising end markets which STMicroelectronics serves.
Dutch Bros (BROS)
Starbucks has long dominated the American coffee market with its sit-down cafe experience. However, the pandemic changed people’s relationship with cafes and caused many folks to rethink their daily rituals.
Meanwhile, demographics are also changing. Starbucks does well with millennials and older consumers. However, Dutch Bros wisely figured out that Gen Z — aka the “zoomers” — might want something else.
Dutch Bros has ditched large stores, instead choosing tiny locations designed to support take-out customers. In addition, Dutch Bros focused on sweet, colorful beverages that look good on social media.
The company has also made a point of hiring personable, engaging staff. With all of Starbucks’ current labor tensions and union drives, Dutch Bros could have an advantage on that front as well.
Dutch Bros is still a small operation, with annual revenues of around $700 million. However, it plans to go from its current store base of around 550 stores to 4,000 in the coming years. That growth could draw significant interest from investors.
In the meantime, 23% of the available shares of BROS stock are being sold short, setting the stage for a major short squeeze when the sentiment towards the name improves.
Unity Software (U)
Unity Software (NYSE:U) is the operator of a leading graphics engine. Developers use the company’s graphics engine to design and run video games. Recently, Unity has begun to expand its operations into other areas, such as video animation, architecture, and e-commerce.
Unity, along with its key rival, Unreal, control the majority of the video-game-engine market. It’s difficult for other companies to take share from Unity as many developers have become accustomed to using its platform .
Unity’s claim to fame is that its engine works seamlessly across platforms. A developer can build a game for, say, PCs, and then easily release that same game for use in conjunction with consoles, mobile, and even virtual/augmented reality.
In fact, Unity has long been a leader in developing graphics for virtual reality apps. Mark Zuckerberg reportedly wanted to acquire Unity years ago to serve as the core of its planned virtual reality operations. That acquisition could have come in handy, given how much Meta Platforms (NASDAQ:FB) has spent trying to build its own metaverse recently.
Unity is still working on monetization and has struggled to become profitable. The firm is reliant on ads at the moment, and that would pose a risk if the economy contracts. Regardless, the consumption of video games and related applications should grow meaningfully, making Unity a winner regardless of any near-term macro setbacks.
On the date of publication, Ian Bezek held long positions in V, BRK-B, FB, and U stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.