In the wake of last year's unpleasant stock market downturn, investors have had reason to celebrate in 2023. The S&P 500 at one point gained about 20% from its bear market low, though it has since dipped back a bit. Still, the index stands just 12.6% below its all-time high. If it passes that milestone, it will check the final box necessary to confirm the arrival of a new bull market.
One notable feature of this year's market performance has been the uneven distribution of its gains. Many stocks have yet to shake off last year's bear market, but the so-called "Magnificent Seven" stocks have far outpaced the gains of the broader market so far this year:
- Alphabet -- Up 55%
- Amazon (AMZN 0.89%) -- Up 51%
- Apple -- Up 33%
- Meta Platforms -- Up 161%
- Microsoft -- Up 37%
- Nvidia (NVDA 1.56%) -- Up 194%
- Tesla -- Up 72%
Despite being among 2023's best performers, Wall Street analysts suggest that two of these stocks still have plenty of upside, with the consensus price targets suggesting they could gain 36% and 52%, respectively at this writing, over the coming 12 to 18 months.
Image source: Getty Images.
Magnificent Seven buy No. 1: Amazon -- 36% implied upside
While most companies have difficulty making a dent in a single business, Amazon has proven its mettle by leading two industries. Its strengths in these markets, combined with its emerging opportunities, could propel Amazon stock to new heights.
During last year's period of high inflation and rising interest rates, consumer spending was hit hard, but inflation has dropped significantly and pundits now see the potential for the Federal Reserve to cut interest rates again -- both factors that are spurring a rebound.
This will no doubt benefit Amazon in its position as the undisputed leader of e-commerce. In 2022, Amazon was responsible for roughly 38% of all online sales in the U.S. -- more than the next 14 digital retailers combined, according to data provider Statista. As consumers increase their discretionary spending online, Amazon will reap the rewards.
The digital transformation is spurring greater adoption of cloud computing, another area where Amazon shines. Despite rising competition, Amazon Web Services (AWS) remains the top cloud infrastructure services provider, with 30% of the market, according to data provider Canalys. The company could maintain or even extend that lead with an assist from the accelerating adoption of generative AI, support for which the company is already offering to its cloud customers.
NASDAQ: AMZN
Key Data Points
Despite its robust gains so far this year, Wall Street is still incredibly bullish on Amazon. Among the 53 analysts covering Amazon, the stock has a median price target of $170. This suggests potential upside for investors of 36% over the coming year, compared to the stock's closing price on Friday.
Furthermore, in September, of the 53 analysts who had issued opinions, 51 rated it a buy or strong buy, and not a single one recommended selling.
Part of the attraction is Amazon's historically low valuation. The stock is currently selling for 2 times next year's expected sales, near its lowest valuation since 2016. That's even more incentive for investors to buy Amazon stock hand over fist and hold onto it for the long term.
Magnificent Seven buy No. 2: Nvidia -- 52% implied upside
One of the biggest catalysts that has spurred the stock market recovery this year is the rapid and accelerating adoption of generative AI -- and arguably no company is better positioned to profit from this trend than Nvidia.
The company's state-of-the-art graphics processing units (GPUs), technology originally developed to generate higher-quality images in video games, have also become also the gold standard for powering cloud computing and AI systems. As businesses of all sizes scramble to join the AI gold rush, Nvidia has experienced an unprecedented surge in demand.
The company's recent results caught even the most bullish on Wall Street by surprise. For its fiscal 2024 second quarter (which ended July 30), Nvidia's revenue grew 101% year over year to a record $13.5 billion, while its diluted earnings per share soared 854% to $2.48. Driving those results was data center revenue that soared 171%, spurred on by demand for hardware to power generative AI.
NASDAQ: NVDA
Key Data Points
For its fiscal Q3, Nvidia is anticipating another set of record results, forecasting revenue of $16 billion, which would be an increase of 317% year over year, again driven by soaring demand for AI.
Though its stock price has nearly tripled so far this year, Wall Street sees more potential for Nvidia to gain ground. Among the 53 analysts that covered the stock in September assigned it a median price target of $630. This suggests potential gains for investors of 52% over the coming year, compared to the stock's closing price on Friday. Furthermore, of the 53 analysts, 50 rated it a buy or strong buy, and none recommended selling.
It's important to address the elephant in the room -- Nvidia's lofty valuation. The stock is currently selling for 40 times forward earnings and 13 times forward sales. While Nvidia's valuation is certainly steep, the company's growth deserves a premium valuation. While its revenue has increased 123% so far this year, its profits have soared 335%, causing its price-to-earnings ratio to contract and its valuation to fall. Further contraction is likely as the demand for AI continues to soar, pushing its earnings even higher.
