The technology industry has created more value for investors than any other in U.S. history. All five American companies with valuations topping $1 trillion operate in the tech sector.
While many tech stocks have had an impressive 2023 so far, the broader stock market (including many tech stocks) experienced a partial pullback since the beginning of August. The drop was related to seasonal weakness along with persistently high interest rates that threaten to slow the economy. The pullback gives investors a rare opportunity to buy some of America's tech giants at a bit of a discount.
Later this month, Google parent Alphabet (GOOGL 0.66%) (GOOG 0.56%) and e-commerce giant Amazon (AMZN 2.29%) will report their financial results for the third quarter. Both companies reported accelerated revenue growth in the prior quarter, and investors are wondering if they could report more of the same in the third quarter.
Here's why now might be a great time to buy a stake in both companies ahead of their results, especially given their discounted stock prices.
1. Alphabet
In 2023, Alphabet finds itself in an escalated battle over artificial intelligence (AI) with rival Microsoft. The latter company bought a $10 billion stake in ChatGPT developer OpenAI in January and integrated it into its Bing search engine, which threatened to upend Google's dominant position as the window to the internet. Investors were initially nervous about Alphabet's response, but it has made strides in AI in recent months.
The challenge from Microsoft came at a bad time for Alphabet because it was coming off sluggish full-year 2022 revenue growth of just 10%, down from 41% growth in the prior year. A challenging economy over the last 18 months led businesses to spend less on advertising, which hurt Alphabet-owned platforms like Google Search and YouTube because they rely almost entirely on ad dollars.
That weakness carried into 2023, with first-quarter revenue growing by just 3% year over year. However, Alphabet finally saw a reacceleration in growth to 7% in the second quarter, led by three things:
- More advertising dollars flowing into Google Search.
- A return to growth for YouTube.
- An impressive 28% increase in Google Cloud revenue.
Wall Street estimates suggest the company will report growth of almost 10% in the third quarter, which would mark a further acceleration.
Circling back to Alphabet's AI efforts, they might be the key reason to own its stock. The company released a chatbot to rival ChatGPT (called Bard), and it has integrated additional AI into the traditional Google Search experience. Now, when a user enters a query, Google often places a text-based answer at the top of the page rather than forcing the user to sift through web results.
Alphabet highlighted the substantial progress it's making on AI for Google Cloud during its second-quarter conference call with investors. The platform has now attracted more than 70% of the generative AI start-ups with valuations of at least $1 billion, thanks to its diverse portfolio of supercomputer hardware. Google Cloud customers can access and build upon 80 different AI models, and management said it saw a 15-fold increase in the number of developers adopting them between April and June.
With Alphabet stock still trading down 7.6% from its all-time high, it trades at a price-to-earnings (P/E) ratio of just 29.1, which is a discount to the 29.7 P/E of the Nasdaq-100 index. It makes Alphabet one of the cheapest trillion-dollar tech giants by that metric, so now might be a great time to buy ahead of what could be further progress on AI in its upcoming third-quarter report.
2. Amazon
While Amazon built its business on e-commerce, its ascent to a trillion-dollar valuation came from a relentless focus on innovation and expansion. The company is now the leader in cloud computing through its Amazon Web Services (AWS) platform, and it has built successful streaming businesses for television and movie content, plus music.
Like Alphabet, Amazon's 2022 revenue growth came in light, at just 9%, after increasing by 22% in 2021. E-commerce is still the company's largest driver of revenue, and it's extremely sensitive to changes in consumer spending. AWS revenue has also slowed as businesses focus on optimizing their digital infrastructure rather than investing more money in expanding it.
But Amazon did see an acceleration in overall revenue growth to 11% year over year in the second quarter. Online sales grew 5%, the fastest since the final quarter of 2022, and while AWS revenue growth did slow to 12% year over year, that number was above Wall Street's expectations.
Amazon is now focusing heavily on AI. The company is fresh off a $4 billion investment in AI start-up Anthropic, which has created a chatbot with a focus on safety and responsible development. But more broadly, AWS is protecting its position as the world's largest cloud platform by rapidly building its portfolio of AI hardware and software products. It has developed two AI chips called Inferentia and Trainium, and it has a set of in-house large language models called Titan, which AWS customers can build upon.
Anthropic will train its future AI models on Amazon's chips under their new partnership, which is a huge vote of confidence from the start-up. It could help attract more AI developers to the trillion-dollar giant's hardware, especially if they want an alternative to Nvidia's chips, which are available at almost every cloud provider.
Amazon will likely highlight further progress on its AI initiatives in its third-quarter report later this month. According to the high end of its guidance, the company could deliver $143 billion in total revenue, which would be 13% growth year over year. That would mark an even further acceleration.
Amazon stock trades 31% below its all-time high, so now might be a great chance to buy since the company appears to be back on the upswing.
