When it comes to growth stocks, durability is key. Earnings growth is all about the future, so investors need to be confident nothing’s going to go wrong between now and then.
Artificial intelligence (AI) is creating huge opportunities, but it’s also threatening a number of established businesses. With that in mind, I’m looking to be careful with my investing.
Brown & Brown
Shares in insurance broker Brown & Brown (NYSE:BRO) fell 6% on Tuesday (28 October) after the firm’s earnings report. And looking at the results, I think I can see why.
Organic revenue growth of 3.5% was the weakest it’s been in some time. This was largely due to an unusually competitive insurance market, which the company can’t do anything about.
While the past isn’t a guarantee of the future, history tells us that these environments don’t tend to last for too long. And I’m looking to use this as an opportunity to buy the stock.
I’m really impressed by Brown & Brown as a company. It combines economies of scale with the benefits of local expertise and it operates in a market that’s undergoing consolidation.
I think that means there’s significant scope for growth, both through higher margins and via acquisitions. And the firm is in the process of working through a deal worth almost $10bn.
A deal of that size inevitably brings integration risk and they’ve paid a high multiple for it. But I’m excited to have the opportunity to buy the stock at a price below $85.
Salesforce
Analysts have pretty optimistic views of Salesforce (NYSE:CRM) at the moment. But I’m extremely wary about what AI means for the future of the company’s business.
The firm’s Agentforce platform allows customers to build and deploy their own autonomous AI agents. And it’s saving Salesforce money in the form of 4,000 fewer customer support staff.
The trouble is, I think it’s also likely to stunt the company’s growth. Specifically, I suspect AI is going to mean other businesses are in a position to build their own AI agents themselves.
Salesforce’s key competitive strength has been its switching costs. And I don’t expect those to disappear, which should give the company the ability to generate growth by raising prices.
The firm’s ability to do this, though, is going to be limited if customers can do something similar at a lower cost elsewhere. And this is showing up in estimates of future earnings.
Analysts expect earnings per share to grow at 9% a year up to 2028. That’s not intrinsically terrible, but I don’t think it justifies me buying the stock at a price-to-earnings (P/E) ratio of 37.
Opportunities and threats
As an investor, I want to own shares in companies that are going to be worth more in the future. And that means ones that are going to be able to grow their earnings for a long time.
I think Brown & Brown fits the bill and I currently hold it. A fragmented US middle market should bring growth opportunities in the future and makes short-term weakness a buying opportunity for me.
With Salesforce, the story is different. The rise of AI looks like a threat to its competitive position and growth prospects, which is why I think I have better opportunities elsewhere.
