Growth stocks or value stocks? Solving the 2024 U.S. stock investment multiple-choice question

Why Is Everyone Flocking to Growth Stocks

In the past two years, the U.S. stock market has been characterized by one word—rising. The biggest driving force behind this is the AI wave, which has revitalized many established companies, causing their stock prices to soar. Growth stocks like TESLA and NVIDIA can double in a short period, making them very attractive. However, investment masters like Warren Buffett are taking a different stance, favoring the stability of value stocks.

Who is right? Actually, this isn’t a black-and-white issue.

Growth Stocks vs. Value Stocks: What Are the Fundamental Differences?

Core Characteristics of Growth Stocks

Growth stocks refer to companies that are still in a high-speed growth phase. These companies operate in markets that are still exploding, with promising prospects but also higher risks. Because their revenue and profits are soaring year after year, evaluating them with current P/E ratios can make them seem very cheap—that’s why these stocks often have extremely high valuations.

Typical features: Revenue growth rate usually exceeds 20% annually, with large stock price fluctuations that can lead to significant gains or losses in the short term.

Investment Logic of Value Stocks

Value stocks focus on whether the current stock price is below the company’s actual worth. Investors emphasize the company’s fundamentals and moat, seeking stable appreciation and dividends. These companies are usually mature, with steady but predictable growth, and relatively manageable risks.

Quick Comparison Table of the Two Types of Stocks

Historical Cases: The Dual Nature of Growth Stocks

The Legend of Amazon

When investing in Amazon in 2000, its P/E ratio soared over 100. Most investors thought it was a “bubble.” But two years later, the same stock’s P/E ratio had dropped to a few dozen, and after a few more years, it was in the single digits. The reason was simple: Amazon’s e-commerce business was in an explosive growth phase, and it had also found a new growth driver in cloud services, which fully supported its valuation.

The Lesson from ZOOM

During the pandemic, remote meetings exploded in popularity, and ZOOM’s stock price soared accordingly. But the problem was: market share was gained, but profits did not meet expectations. The result was a bubble that burst.

Conclusion: Not all growth stocks can succeed like Amazon. Many fail in competition or cannot sustain valuations, leading to sharp declines in stock prices.

How to Pick Truly Worthy Growth Stocks

First: Revenue Growth Rate

Since they are called growth stocks, revenue must be impressive. Generally, a continuous annual revenue growth rate exceeding 20% over several years is considered a baseline.

Second: Industry Ceiling

Some markets are already saturated, such as personal computers and smartphones. No matter how innovative, explosive growth is hard to achieve. True growth stocks emerge in industries that are still rapidly expanding.

Third: Valuation Premium

High valuation isn’t necessarily bad. If a company maintains a high valuation over the long term but its performance can support it, it indicates the market recognizes its potential. Amazon in the past and TESLA in 2020 were both overhyped, but in hindsight, they were undervalued.

The Most Promising Growth Sectors in 2024

1. GOOGLE in the AI Wave

AI costs are decreasing by 75% annually (production costs down 53%, training costs down 47%), accelerating AI adoption. While NVIDIA is currently the most prominent, companies providing application layers like GOOGLE have more sustainable growth potential. GOOGLE’s data advantage allows applications like Bard to better learn user habits, making its growth prospects worth watching.

2. COINBASE in the Bitcoin Ecosystem

Data shows that Bitcoin’s returns over the past 5 years outperform gold, real estate, bonds, and other mainstream assets. Currently, global asset allocation in Bitcoin is less than 1%. If it increases to an optimal 19.4%, Bitcoin could rise to $2.3 million per coin. Trading volume would also expand, and as the largest publicly listed cryptocurrency exchange, COINBASE would directly benefit.

3. SOFI in Digital Finance

AI development is changing work patterns; by 2030, average working hours will drop to 4.5 hours, with a significant increase in leisure and entertainment time. Online entertainment spending is projected to grow at 19% annually, from $7 trillion in 2023 to $23 trillion in 2030. Companies like SOFI, with deep customer insights, will surpass traditional banks. Revenue is expected to grow at 20%-25% annually from 2023 to 2026, with EPS rising from $0.55 to $0.80 by 2026.

4. LLY in the Healthcare Industry

AI can significantly shorten drug development times. Even as development costs decrease, drug prices continue to rise annually. Over the next 7 years, AI combined with medical innovation could generate over $1.5 trillion in value for pharmaceutical companies. Lilly, with its blockbuster GLP-1 weight-loss drug, has huge growth potential.

5. TESLA in Electric Vehicles

Battery costs decrease by 28% with each doubling of production (Lattice Law). As costs decline, EV sales will grow exponentially. Once regulations permit autonomous taxis(robotaxi), the growth potential is even greater. Over the next 7 years, EV sales are projected to grow at 33% annually, from 10 million units in 2023 to 74 million in 2030. TESLA, focusing on data collection, has a clear advantage in the robotaxi race.

6. Automation Upgrades with ROK

Over the past 7 years, computer vision and deep learning performance have increased 33-fold, leading to explosive growth in collaborative robot applications. Once mature, robotics will generate an additional $12 trillion annually for businesses. Rockwell Automation is a leader in industrial automation, and the opportunities brought by AI are enormous. Currently, high interest rates are delaying factory upgrades, which puts pressure on stock prices but also creates buying opportunities.

7. Manufacturing Transformation with PTC

3D printing reduces mold costs; TESLA uses 3D printing to cut mold opening time by over half, and design validation costs are reduced by 97%. In healthcare, 3D printing enables customization, with accuracy improved by 40%-50% and surgical times shortened by 30%. Over the next 7 years, 3D printing revenue is expected to grow at about 40% annually, from $18 billion in 2023 to $180 billion in 2030. PTC integrates 3D printing with software services, making growth highly promising.

Two Core Strategies for Investing in Growth Stocks

Strategy 1: Identify Genuine Growth

Not all companies in growth industries benefit substantially. The market often fears missing out and inflates related stocks. Investors must clearly distinguish: which companies have solid performance support, and which are bubbles.

Strategy 2: Set Exit Conditions

Exiting isn’t just about growth stopping; valuation matters too. A high P/E ratio indicates the market has already priced in future high growth. Once a company’s valuation is inflated, continued growth may not justify the current valuation, leading to situations where “performance improves but stock price declines.”

Conclusion: The Correct Approach to Growth Stock Investing

Growth stocks carry high risks but also great opportunities. The key is a comprehensive assessment before entering. Proper risk management and asset allocation can turn growth stocks into wealth accelerators. Remember: not all high valuations are signals of danger, nor are all low valuations buying opportunities. The crucial factor is whether valuation and growth are aligned.