Many tech stocks fell out of favor last year as interest rates rose. But throughout 2023, a lot of top tech stocks bounced back as investors focused on the secular growth of the cloud, artificial intelligence (AI), and e-commerce markets again.
As we've seen over the past few decades, the right stocks in those three growth markets can potentially turn a modest $3,000 investment into tens of thousands of dollars. Let's take a look at three top long-term picks from those hot sectors: Nvidia (NVDA 6.18%), Cloudflare (NET 1.44%), and MercadoLibre (MELI 3.09%).
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1. The AI play: Nvidia
Nvidia is the world's largest producer of discrete GPUs for data centers and PC gaming. Its revenue growth flatlined in fiscal 2023 (which ended in January 2023) as the macro headwinds throttled its data center business and the post-pandemic slowdown of the PC market curbed its sales of gaming GPUs. But for fiscal 2024 Nvidia expects its revenue to surge 118%, while analysts expect its adjusted EPS to more than triple.
That abrupt acceleration can be attributed to the explosive growth of the AI market. The surging popularity of generative AI platforms like OpenAI's ChatGPT is prompting companies to upgrade their data centers with more of Nvidia's GPUs, which can process AI tasks more efficiently than stand-alone CPUs. Nvidia generated 80% of its revenue from its data center business in its latest quarter, but its gaming business is also growing again as the PC market gradually stabilizes.
Nvidia's first-mover's advantage in the data center GPU space will enable it to profit from the growth of the generative AI market, which Fortune Business Insights expects to expand at a compound annual growth rate (CAGR) of 47.5% from 2023 to 2030. Analysts expect its revenue to grow at a CAGR of 57.5% from fiscal 2023 to fiscal 2026. Its adjusted EPS is expected to climb at an even higher CAGR of 129%.
Nvidia's stock has already risen more than 800% over the past four years, yet its stock still looks reasonably valued at 25 times forward earnings. If you believe the AI market will continue to expand, then Nvidia is a top stock to buy and hold.
2. The cloud play: Cloudflare
Cloudflare is one of the world's leading content delivery network (CDN) providers. Its CDN platform accelerates the delivery of digital content from websites by storing cached copies of that data on "edge" servers that are located closer to their visitors. It also shields those websites from bot-based attacks by making visitors prove they're human.
Cloudflare has grown like a weed since its IPO in 2019. Its revenue rose 50% in 2020, 52% in 2021, and 49% in 2022. It now serves data from 310 cities across more than 120 countries, and it processes an average of 50 million HTTP requests per second. Over the long term, it believes it can become a "water filtration" system for the modern internet.
Cloudflare's growth slowed down over the past year as the macro headwinds forced companies to rein in their spending. However, it still expects its revenue and adjusted EPS to rise 32% and 250%, respectively, in 2023. From 2022 to 2025, analysts expect its revenue to grow at a CAGR of 29% as its adjusted EPS rises at a CAGR of 76%.
Cloudflare's stock doesn't look cheap at 140 times forward earnings, but its rapid earnings growth could compress its valuations over the next few years. It's also well poised to profit from the growth of the AI market -- it recently launched its Workers AI platform for developing AI apps like chatbots directly on its CDN, and it's installing Nvidia's GPUs into its edge networks to accelerate the delivery of AI apps across its hosted websites.
3. The e-commerce play: MercadoLibre
MercadoLibre is the largest e-commerce company in Latin America. From 2012 to 2022, its revenue grew at a CAGR of 40% as its three core markets -- Brazil, Mexico, and Argentina -- fired on all cylinders. It also turned profitable in 2021 and 2022 as economies of scale diluted its shipping and payment processing costs.
MercadoLibre hosted 120 million unique active users across its e-commerce and fintech platforms in its latest quarter, but it still has room to grow. According to Mordor Intelligence, the Latin American e-commerce market could expand at a CAGR of 19% from 2023 to 2028 as income levels and internet penetration rates continue to rise.
MercadoLibre established a first-mover advantage across Latin America by expanding its logistics network across difficult terrain long before overseas challengers like Amazon and Sea Limited's Shopee waded into the market. It also locks in its users with its digital payments platform Mercado Pago, which serves as the foundation of its expanding ecosystem of fintech services.
MercadoLibre still faces macro and inflationary headwinds across Latin America, but analysts expect its revenue to continue rising at a CAGR of 26% from 2022 to 2025. It's also expected to grow its EPS at a CAGR of 66% as its margins keep expanding. MercadoLibre's stock might seem a bit pricey at 46 times forward earnings, but I believe it still has plenty of upside potential as it leaves its e-commerce rivals in the dust.
