Pinpointing which stocks are set for massive upside is key to becoming a successful investor. While you can never be certain what a stock will do, there are clues you can find that could lead you to those conclusions.
In my opinion, Amazon (AMZN 3.43%) and Airbnb (ABNB 0.75%) are set to take off in 2024. Both are well-positioned to grow in the coming year, and each also looks attractive from a valuation standpoint.
Amazon
Amazon stock has had a successful 2023, rising about 75%. With a year like that, many investors would be forgiven for thinking that Amazon is slated for a rough 2024. But they'd be wrong.
Amazon entered 2023 at an astonishingly low valuation. Unfortunately, none of us can return and take out a second mortgage to pile into it, so we're left with the next best thing: Buying it now.
For Amazon, 2023 has been a successful year primarily because it improved its efficiency. CEO Andy Jassy has been working on resolving some of the growth-at-all-costs measures that Jeff Bezos initiated before moving on from the CEO role. The job isn't finished yet, and Amazon is working on becoming even more efficient.
But the results so far have been outstanding. In Q3, Amazon produced an impressive $8.7 billion in free cash flow. It was the second straight quarter of Amazon producing positive cash flow following a period of negative results that began in 2021, and shows that its efficiency measures are working out.
This same effect can be seen in Amazon's rising operating margins.
AMZN Operating Margin (Quarterly) data by YCharts.
If Amazon can sustain these gains, it will piece together a full year of strong profits -- something it hasn't done. As a result, the market has yet to see Amazon's true potential, making it an exciting stock heading into 2024.
Airbnb
In the years since it became a public company, Airbnb hasn't received much respect from investors. Constant fears of recessions harming the business and municipalities banning short-term rentals have prevented the stock from reaching its potential.
Even though these fears and issues are still prevalent, they haven't affected Airbnb's business much. In Q3, revenue rose 18% year over year to $3.4 billion. Airbnb is also a cash flow machine, converting 38% of its revenue into free cash flow. This makes Airbnb one of the best cash-generating businesses out there, yet the company isn't valued like it.
Despite growing faster and having better margins than many tech giants (and Airbnb should be valued like a tech stock because the business is essentially travel booking software), Airbnb is valued at a much lower level.
MSFT Price to Free Cash Flow data by YCharts.
This makes Airbnb appear undervalued, and the management team agrees. In Q3, it spent $500 million on share repurchases -- well in excess of the $286 million it distributed in stock-based compensation. Over the past year, its buyback program has allowed Airbnb to reduce its outstanding share count by about 2.4%.
Over time, this should add significant value to its remaining outstanding shares. Plus, it's only spending around a third of its free cash flow output on buybacks, so it can stockpile plenty of cash for acquisitions and has lots of room to accelerate its pace of buybacks if management chooses to.
Will 2024 be the year Airbnb finally gets respect from Wall Street? I'm not sure. But with strong growth and stock buybacks powering improved earnings, right now looks like an excellent time to become an Airbnb shareholder.
