Inflation in the U.S. climbed to concerning levels in 2022. The August estimate came in at 8.3%, which was down only marginally from the 40-year high of 9.1% set in June. As a result, the Federal Reserve is aggressively increasing interest rates to slow the economy down and hopefully cool prices.
These circumstances force consumers to tighten their belts, and that's hurting industries like retail and e-commerce. Plus, technology companies that rely on advertising revenue struggle as businesses curb marketing spend to compensate for the weaker economy.
But what if those factors resolve in the new year? Inflation expectations for 2023 continue to fall, giving investors a chance to position themselves right now for better times in the new year. Two stocks that could benefit the most are Amazon (AMZN 3.43%) and Google parent Alphabet (GOOGL 10.22%) (GOOG 9.96%). And thanks to recent stock splits, it's now more affordable to buy shares in both companies.
Stock splits: Why they matter
Up until a few months ago, it would cost an investor $2,447 to buy a single share of Amazon and $2,235 to buy a single share of Alphabet. That's a little pricey for the typical retail investor who might have a relatively small stock portfolio. To help resolve this, both companies executed a 20-for-1 stock split.
It increased the number of Amazon and Alphabet shares in circulation by 1,900%, shrinking their price per share in equal proportion. Now, if you want to own a single share of Amazon and Alphabet you only need to fork out about $116 and $98, respectively.
That makes these two stocks accessible to investors of all sizes. Here's why the shares are worth buying now based on the fundamentals of their businesses.
1. Amazon's e-commerce business could bounce back
Amazon is the largest e-commerce company in the world, and while it has diversified into other industries like cloud services, video streaming, advertising, and even electric vehicles, the gigantic Amazon.com online store is still its bread and butter.
But in the first half of 2022, Amazon's e-commerce segment generated $199.5 billion in revenue, which represented growth of just 3.2% year over year -- much slower than the double-digit growth investors are accustomed to. By comparison, the metric jumped by 34.8% during the same period of 2021. The company is clearly feeling the effects of this challenging economy with consumers dialing back their spending, but that's a double-edged sword that could see Amazon have a great 2023 if things turn around.
In the meantime, the company's cloud business continues to shine, growing by nearly 35% so far this year thanks to Amazon Web Services (AWS). It's also responsible for all of Amazon's operating income for the period because it's a highly profitable segment. The cloud might be a $1.5 trillion opportunity by 2030, according to an estimate by Grand View Research, and AWS is already the industry leader.
Additionally, investors have lots to look forward to as Amazon grows its booming advertising business, which could expand on its $16.6 billion in sales in the last two quarters through its blockbuster streaming assets like The Lord of the Rings: The Rings of Power, and the NFL's Thursday Night Football.
Looking at the big picture, analysts are betting Amazon could generate $522 billion in total revenue next year, marking the first time it crosses the half-trillion dollar threshold.
2. Alphabet is a titan in digital advertising
Few companies are as proficient in the digital advertising business as Alphabet. It has two key assets where businesses constantly want to be visible: Google Search and the YouTube video streaming platform. But in the first half of this year, Alphabet's total revenue grew by just 17.5%, a steep slowdown from the 47.6% it jumped in the year-ago period. Put simply, businesses are investing less money in reaching consumers right now.
Google Search completely dominates its industry, with a 92% global market share. No competitor even comes close -- not even trillion-dollar giant Microsoft has made a dent with its Bing platform. Advertising revenue generated by Search accounted for about 58% of Alphabet's total $69.8 billion in revenue during the second quarter of 2022 (ended June 30), so it remains the most important piece of the business.
But YouTube could be the more exciting segment in the near term. It faces a new growth opportunity thanks to its Shorts video format, which was developed to compete with ByteDance's TikTok, the global app-based short-form video king. Shorts already boasts 1.5 billion monthly active users after just two years in business, placing it alongside its rival. This format could be a major revenue generator next year (and beyond) as businesses try to reach young consumers.
Alphabet stock lost 35% of its value from its all-time high as investors digest the impact of the temporarily shrinking digital ad business. But digital is most certainly the future, and if an economic rebound were to happen in 2023, Alphabet's recent losses could merely be an opportunity to buy in at a very attractive discount.
