The market has ripped aggressively higher to start 2023. The broad-based S&P 500 Index is up 9%, while the technology-heavy Nasdaq 100 is up 18% year to date (YTD), and we've barely made it out of January. After a brutal 2022 for growth and technology stocks, it looks like things may be finally turning the corner for investors, with inflation readings coming down and the United States economy escaping a recession (at least for now).
Spotify (SPOT -7.28%), Tesla (TSLA 12.06%), and Amazon (AMZN -1.64%) are three stocks that led the stock market rally last month. But does that mean they are buy-worthy today?
1. Spotify: Profits finally arriving?
In its fourth-quarter earnings release earlier this week, Spotify continues to put up steady user growth for its music and audio service. Monthly active users (MAUs) grew 20% year over year to 489 million in the quarter, while premium subscribers grew 14% to 205 million. In the first quarter of 2023, Spotify expects to reach 500 million MAUs, putting it halfway to its goal of reaching 1 billion active users around the globe.
The company is now the clear leader in audio streaming globally, executing a successful strategy in adding podcasts and other formats along with its legacy music streaming product. Shares of the stock are now up 48% year to date (YTD), handily outpacing the broad market indices. With many years left in the consumer transition from analog to digital streaming for music and audio, investors are getting optimistic about how big Spotify's user base can get, even with strong competition from the likes of YouTube and Apple.
However, one big lowlight for Spotify is profitability, or lack thereof. Last quarter, operating losses were around $250 million, which is something investors need to keep a close eye on in the coming years. Spotify management promised on its latest conference call that it was working to get toward profitability with its recent employee layoff and a greater focus on efficiency throughout the organization. Time will tell if this will translate to the income statement.
Overall, Spotify looks to be in a great place at the moment. If it can continue growing users and achieve profitability, there are likely many more gains to be had by owning the stock.
2. Tesla: Price cut worries
The leading electric vehicle (EV) manufacturer soared in January after reporting better-than-expected earnings for the fourth quarter. As of this writing, shares of Tesla are up 76% YTD, which is amazing to see for a company with a market cap of over $500 billion. The company guided for vehicle production of 1.8 million in 2023, with CEO Elon Musk saying they could hit 2 million if everything goes right. For reference, 2022 production was 1.37 million. Investors took this as a hugely positive sign, bidding up shares aggressively in the days following its report.
However, I think investors in Tesla should be concerned with the company's deteriorating margins. Gross margins for its automotive business have declined for four straight quarters and are poised to drop even further after the company lowered prices by 5% to 20% around the globe. Competitors like Ford have responded to these price cuts by lowering their prices for the electric Mustang, indicating that industry participants are not afraid to enter a price war with the incumbent EV maker.
Yes, the EV revolution is here and presents a massive revenue opportunity for automotive manufacturers to go after. But with a growing glut of supply and thin margins that are heading lower, the total industry profit pool might be smaller than investors imagine. With a trailing price-to-earnings ratio (P/E) of 55 -- which is more than twice the market average -- Tesla stock looks incredibly risky if its profit margins continue to slide in 2023.
3. Amazon: Moving beyond the pandemic
The last stock on my list is Amazon, which is one of the technology giants with a market cap north of $1 trillion. Amazon stock is up a solid 20% YTD.
Investors have been worried about a lack of profitability at Amazon, which has struggled to deal with the wild swings of the e-commerce market during the COVID-19 pandemic. Originally, Amazon was underbuilt for the surge in demand on its e-commerce platform. Then, in 2022 with the e-commerce market falling back to its long-term trend, management realized it had overbuilt capacity, causing major margin deterioration with empty warehouses gobbling up segment operating budgets.
AMZN Operating Margin (TTM) data by YCharts
In 2023, it looks like the company has finally rightsized its capacity, which should lead to a recovery in margins. For example, its North American retail segment grew revenue 13% year-over-year in the fourth quarter, which shows that the company is growing into its real estate footprint. Along with a recent layoff of 18,000 workers, operating expenses should stabilize or even decline in 2023. Outside of e-commerce fulfillment, the company still has two highly profitable business units in Amazon Web Services (AWS) and advertising, both of which are growing faster than consolidated revenue. Over the long term, this should lead to margin expansion for Amazon.
Amazon looks to be in a great spot right now with the steady growth of e-commerce along with AWS and advertising. Even with the stock up over 20% this year, now could be a great time to add shares to your portfolio.
