The stock market has been driven by narratives this year. At the start of the year, companies that aggressively cut costs in advance of what could have been a deep recession were seen as the winners. Now, we have investors bidding up artificial intelligence (AI) stocks, despite very little direct revenue from AI for most companies.
The four stocks that are driving higher and I think could continue that trend are Meta Platforms (META 0.43%), Adobe (ADBE 0.87%), Uber (UBER -0.38%), and Shopify (SHOP 1.11%). They have market-leading positions in attractive markets and the only worry I have with each is their valuation.
Image source: Getty Images.
Meta Platforms' turnaround
Meta Platforms stock is up 161% so far in 2023 and operationally the company is firing on all cylinders. Its advertising business has largely recovered from the impact of Apple's app-tracking transparency and is once again growing on the top and bottom line.
META Revenue (TTM) data by YCharts
The investment in the metaverse and virtual/augmented reality hasn't paid off yet, but there's a potential upside in AI. Management announced augmented reality (AR) glasses that actually use AI as a conversational tool and can identify objects in images. This could be used as a tool to gather more information and provide advertising in the real world, where Meta has the data to leverage these products.
Meta's stock is 19 times forward earnings, but this is a high-quality company that's still growing and could easily drive even higher.
Adobe goes all in on AI
One company that's taken advantage of advances in AI is Adobe. Instead of seeing AI as a threat, Adobe has used it as a point of strength.
Photoshop has added a variety of tools that allow AI to augment designers' work and make them more efficient. Backgrounds can be modified, edges of images can be extended, and edits are easier than ever. And Adobe does this with a custom model that was trained using images it owns, so there are no copyright issues for customers.
Like Meta, Adobe is expensive at 30 times next year's earnings estimates, but given the stickiness of the business and growth opportunities as the company's products become more accessible, this is still a great buy-and-hold stock.
Uber solidifies its lead
Uber has been improving its operations all year and I think it's finally established both a sustainable network lead over Lyft and a positive-cash-flow business.
It's done this by expanding the market through delivery services and increasing the take rate, or percentage of each transaction the company keeps.
UBER Free Cash Flow (Quarterly) data by YCharts
There's an opportunity to expand further and leverage the existing infrastructure. Uber's technology infrastructure and network of drivers are second to none, and I don't see anything changing that in the foreseeable future. Shares are trading at 26 times forward earnings estimates, and if management can continue to push free cash flow higher, this could be a great stock to hold long term.
Shopify changes course
After a few years of venturing into non-core markets like shipping, Shopify coalesced around what it does best -- building e-commerce sites and connecting sellers with third-party tools they need.
The company recently pushed through a price increase that should help improve the bottom line and is cutting costs to improve margins. A smaller Shopify is seen as a good thing, with shares up 48% year to date.
SHOP Net Income (TTM) data by YCharts
There seems to be a truce in e-commerce with Shopify servicing small merchants with their own sites yet being able to offer Amazon's Prime service, reducing competition between the two. For Shopify, it should solidify the company's position as a go-to platform for merchants, and with fees on the rise that's great for financials long term.
Momentum in technology
These are all great technology companies with leads over the competition that may be insurmountable. And that bodes well for their financial success in the future.
