Investors have started buying growth stocks again, following favorable data on the inflation front that has led the Federal Reserve to reduce the pace of interest rate hikes. Meanwhile, the U.S. economy grew at a faster-than-expected pace in 2022's fourth quarter despite higher living and borrowing costs.
Technology stocks have benefited big time from these positive economic data points. This is evident from the Nasdaq-100 Technology Sector index's 18% rally so far in 2023. This impressive move has also rubbed off positively on shares of Alphabet (GOOG -2.03%) (GOOGL -1.94%) and Shopify (SHOP -1.90%). While Alphabet stock has gained 7% in 2023 despite recent troubles, Shopify stock is up a whopping 40%.
Let's look at why these tech stocks could head higher this year, and why investors may want to buy them now.
1. Alphabet
Alphabet stock rallied impressively in January, but the company's Q4 2022 report (released on Feb. 2) turned out to be a dampener. Revenue was slightly below expectations, and earnings were way below what Wall Street was looking for thanks to weakness in the advertising business. Alphabet's Q4 revenue of $76 billion was up just 1% over the prior-year period, a sharp deceleration from the 32% year-over-year jump it had reported in the same period a year ago.
Earnings per share fell a whopping 32% over the year-ago quarter to $1.06 per share as the company's costs increased at a much faster pace than the meager revenue increase. Wall Street was looking for $1.18 per share in earnings from the company. Alphabet ended the year with revenue of nearly $283 billion, up 10% over the prior year.
At the same time, Alphabet stock took a big beating after its Bard artificial intelligence (AI) chatbot answered a question wrong during its unveil, suggesting that the tech giant hastily released its product in response to Microsoft-backed ChatGPT.
But savvy investors should consider looking past the recent problems at Alphabet as there are a few reasons why it may be able to accelerate its growth in 2023, especially in the advertising business that generates the bulk of its total revenue. Alphabet's advertising revenue fell 3.6% year over year in the fourth quarter of 2022 to $59 billion, accounting for 78% of its top line.
The business was affected by weak spending by advertisers, which is not surprising as the global digital advertising market witnessed a major slowdown in 2022. Digital ad spending increased only 8.6% in 2022 after 2021's much bigger increase of 29.5%, according to eMarketer. But things could improve this year, as digital ad spending is expected to increase at a faster pace of 10.5%.
The easier comparisons and the fact that Alphabet is working to incorporate more artificial intelligence (AI) tools to drive better returns for advertisers could give its advertising business a shot in the arm in 2023 and beyond. For instance, the integration of generative AI in Google Search, which could help users gain a deeper understanding and insights, can be a tailwind for Alphabet and help it tap into a potentially lucrative market.
Also, the adoption of AI in advertising is growing rapidly, so Alphabet is doing the right thing by focusing on this area. Media investment company GroupM estimates that AI-enabled advertising could be worth $1.3 trillion in 2032, compared to $370 billion last year.
More specifically, the AI-enabled market accounted for 45% of global advertising revenue last year, a figure that's expected to jump to 90% by 2032. So, Alphabet's focus on this area through its Google AI division could unlock a solid growth opportunity in the long run.
It's also worth noting that Alphabet's cost-control initiatives and the advertising market's growth are expected to translate into healthy earnings growth. The company's 2023 earnings could jump 14% to $5.19 per share, followed by a stronger acceleration of 17% in 2024 to $6.09 per share. Throw in Alphabet's growing influence in the cloud computing business, and investors have yet another reason to buy the stock at current levels.
Alphabet stock is trading at 23 times trailing earnings, a discount to the five-year average earnings multiple of 31. So, investors are getting a good deal on this tech stock right now, given the potential acceleration that's expected in its earnings and the bright prospects of the AI-enabled advertising market.
2. Shopify
Shopify stock has jumped big time in 2023, helped by the broader stock market rally, and that's led to a sharp increase in the company's valuation. The stock sports a price-to-sales ratio of 12 right now, up from the 8.4 at the end of 2022. Still, Shopify looks like a bargain as its sales multiple is much lower than its five-year average price-to-sales ratio of 30.
Demand for the company's e-commerce platform is healthy, leading to impressive growth in its revenue. The company is yet to release its Q4 2022 results, but analysts are expecting it to finish the year with a 19.5% spike in revenue to $5.5 billion. More importantly, Shopify's revenue growth is expected to accelerate in 2023 and 2024, as the following chart indicates.
SHOP Revenue Estimates for Current Fiscal Year data by YCharts
Shopify looks capable of achieving such terrific growth as it provides multiple solutions to merchants conducting business online. From providing payment solutions, allowing merchants to sell their products in multiple international markets, to optimizing advertising spending, and even giving merchants access to capital, Shopify is operating in a space that's set for secular growth.
For instance, the e-commerce payments market is expected to clock 14.5% annual growth through the end of the decade. Meanwhile, Allied Market Research estimates that the cross-border e-commerce market could grow at an annual pace of 26% through 2031. The good news is that Shopify is capitalizing on this opportunity, as evident from the improvement in the attach rate of its merchant solutions.
Shopify's merchant solutions attach rate stood at 2.14% in the third quarter of 2022, which was the highest in its history. The metric is calculated by dividing the company's merchant solutions revenue by its gross merchandise volume (GMV), which is the total dollar value of orders enabled by Shopify's platform. The metric has been heading higher consistently over the years, growing from 1.38% in Q3 2017.
Improvement in the merchant solutions attach rate is a positive indicator for Shopify and points toward the improving adoption of its offerings. And given that the global e-commerce market is anticipated to clock 27% annual growth over the next five years, it won't be surprising to see more merchants adopt its offerings.
All this makes Shopify an enticing e-commerce stock to buy right now, considering its relatively attractive valuation and sunny long-term prospects.
