When the Nasdaq-100 technology index plunged 33% (and into bear territory) in 2022, historical data pointed to a strong recovery in 2023. See, since the inception of the index 37 years ago, it has only fallen in consecutive years on one occasion: during the dot-com crash between 2000 and 2002.
True to form, the Nasdaq-100 has bounced back with a whopping 47% gain this year. But investors will be pleased to know that bodes very well for 2024. In fact, rebound years like 2023 have always been followed by another positive year.
There have been four such occurrences since 1986, and they delivered an average gain of 21.5%. That's the return investors could enjoy if history repeats.
Falling interest rates could send the market soaring in 2024
Consumers have been under pressure from elevated inflation and rising interest rates for the last two years. The U.S. Federal Reserve hiked rates at the fastest pace in its history between March 2022 and August 2023, sending the federal funds rate from a historic low of 0.25% to 5.50%.
Tech giant Amazon (AMZN -1.07%) has felt the pinch, because despite its heavily diversified business spanning cloud computing, streaming services, and digital advertising, e-commerce (retail) is still its largest source of revenue.
But the tide might be turning. Experts predict the Fed will cut interest rates five times in 2024, which will bring welcome relief to consumers across America. But that isn't the only reason to get excited about Amazon stock. Here's why it could be one of the best buys for the new year.
Image source: Getty Images.
Amazon's e-commerce segment could roar back to life in 2024
Amazon generated $220 billion in online sales during 2022, which was a drop of 1% compared to the prior year. But 2023 has been more positive as the pace of rate hikes slowed and more certainty crept into consumer households.
Through the first nine months of the year, Amazon's online sales have ticked up by 3.8%. While it seems like a modest increase, growth has accelerated in every quarter so far and hit 6% in Q3 (ended Sept. 30).
That acceleration bodes well heading into a new year with interest rate cuts on the horizon, because consumers will likely feel more confident about spending. But that isn't the only reason Amazon could do well in 2024; the company has also improved its processes to make its e-commerce business more efficient.
Earlier this year, Amazon split its U.S. national fulfillment network into eight regions. These regional clusters will hold more local inventory and streamline logistics so goods travel shorter distances to reach customers. The changes have already led to the fastest delivery times in Amazon's history, and the company believes this will lead to more sales. Plus, the increases in efficiency could save Amazon money over the long term.
Amazon is emerging as a leader in artificial intelligence
Amazon has spent much of 2023 focusing on artificial intelligence (AI), which could be one of its greatest financial opportunities ever. Most of the company's investments in AI are handled by its cloud computing division, Amazon Web Services (AWS), which manages the data centers and software applications required to serve businesses all over the world.
See, Amazon wants to dominate AI from top to bottom. It developed its own data center chips called Trainium and Inferentia, which are designed to compete with Nvidia's industry-leading hardware. Plus, Amazon wants to offer the most powerful large language models to businesses, so that they choose AWS when they want to develop their own AI applications.
To accelerate its progress, Amazon recently invested $4 billion in leading AI start-up Anthropic. As part of the deal, Anthropic will use AWS as its primary cloud provider, it will train its future large language models using Amazon's chips, and it will make those models available on the AWS platform for customers to use.
Depending which Wall Street forecast you rely upon, AI could add between $7 trillion and $200 trillion to global economic output over the next decade thanks to its ability to boost productivity. It's crucial for Amazon to stake a claim in that enormous market, considering its competitors -- namely, Microsoft Azure and Alphabet's Google Cloud -- are also investing billions of dollars in the space.
Why Amazon stock could be a top performer in 2024
Amazon is the cheapest stock among its trillion-dollar peers based on a traditional valuation metric called the price-to-sales (P/S) ratio. It measures a company's revenue compared to its market capitalization.
Based on Amazon's $570 billion in expected total revenue for 2023 and its current market cap of $1.5 trillion, its stock trades at a P/S ratio of just 2.6. By comparison:
- Apple stock trades at a P/S ratio of 8.1.
- Microsoft stock sports a P/S ratio of 12.8.
- Alphabet (Google) stock trades at a P/S ratio of 6.2.
- Nvidia stock has a P/S ratio of 36.3.
But here's the kicker: Amazon generates more revenue than all of them, including Apple, the largest company in the world (it produced $383 billion in sales in fiscal 2023 ended Sept. 30).
Growth is a key determinant of the P/S ratio; the faster a company grows, the higher the valuation investors are willing to pay. Amazon's total revenue decelerated in 2022 and only increased by 9%, partly because of its lagging e-commerce segment.
But the company is on track to boost its revenue by 11% in 2023, and it could grow by more than 11% in 2024, according to early estimates on Wall Street. By comparison, Apple is expected to increase its revenue by just 3.5% in its current fiscal 2024 year, and 5.7% in fiscal 2025.
But don't forget that Amazon is also positioning itself as a key player in the AI space, which could be the largest financial opportunity in the company's 29-year history. Therefore, I think its stock deserves more credit, and if it manages to close the P/S gap to its peers in 2024, that alone could drive significant gains for investors.
