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I asked the king of the AI chatbots, ChatGPT, what the perfect growth stock looks like. This is what it said:
“A perfect growth stock sells a differentiated product into a fast-expanding market, shows strong demand and scalable economics, holds a defensible moat, has disciplined leadership and a solid balance sheet, and trades at a valuation that still leaves room for upside as margins and cash flow improve over time”.
It’s obviously pretty hard to argue with this description although, in reality, it’s relatively subjective.
So then I asked it: “What company fits this description?”
The answer was phenomenally easy to predict. It said Nvidia.
And it’s hard to disagree. The stock’s a core part of my portfolio — now up nearly 200% on a weighted cost average. It’s got a great balance sheet, it makes a differentiated product that’s proving very hard to compete with, and the valuation remains, in my opinion, attractive.
As I write, it trades at 40 times forward earnings, but with a price-to-earnings-to-growth (PEG) ratio of 1.15. That’s a 30% discount to the sector average, suggesting it may be considerably undervalued.
How to find growth stocks
In recent years I’ve become increasingly aware that Britons pick their growth stocks largely on a hunch. There might be some reasoning behind that hunch, such as it has the best smart phone product or car tech.
However, finding growth stocks should really start with screening. It’s about finding the valuation data for a stock and assessing whether it looks good value versus its growth potential.
Another strong pick?
Nvidia was a great example, but let’s look at something else. One stock I really like is Micron Technology (NASDAQ:MU).
Micron makes two types of memory: DRAM, including HBM (High Bandwidth Memory), which provides ultra-fast, real-time data feeding to AI chips; and NAND, which stores data more cheaply but more slowly. For artificial intelligence (AI), DRAM/HBM is crucial, because model performance depends on bandwidth, not storage.
Luckily, Micron’s a world-leader here.
But it’s also not overly expensive. There’s certainly some hesitancy from the market because memory’s traditionally been quite cyclical. That’s no longer the case, at least in my view, with AI representing a very secular trend.
Currently the stock’s trading at 14.3 times forward earnings (P/E), which is a 37% discount to the sector average. The price-to-earnings-to-growth (PEG) ratio, which is the P/E ratio divided by the medium-term average growth rate, is just 0.22.
These are clear signs of undervaluation.
The balance sheet? $5bn in net debt. It might sound like a lot but that’s small-fry for a company with a market-cap of $271bn.
However, I appreciate that there are other companies in this sector, and Micron’s by no means the largest player. It’s also true that large language models could develop to use less bandwidth, which could hurt Micron’s demand.
Nonetheless, I believe this is a top growth stock, well worthy of consideration.
