Technology stocks soared tremendously in 2023 following last year's dismal performance, evident from the impressive 65% jump in the Nasdaq-100 index this year. A group of seven megacap technology companies known as the "Magnificent Seven" have been the driving force behind the index's red-hot run in 2023.
The Magnificent Seven group is made up of Apple, Amazon, Alphabet, Meta Platforms (META 2.52%), Microsoft, Nvidia (NVDA 1.53%), and Tesla. These Magnificent Seven stocks delivered handsome gains to investors this year, driven mainly by the growing adoption of artificial intelligence (AI) in various industries.
Two of them, however, outperformed the rest by a wide margin. These two names are Nvidia and Meta Platforms. While Nvidia's AI-charged run sent the stock up a whopping 239% in 2023, Meta stock surged an impressive 191%, thanks to a solid turnaround in its business. The good part is that these two companies look set to deliver another solid year in 2024.
Let's look at the reasons why Nvidia and Meta could soar higher in the new year, and also see why investors would do well to buy these two stocks right away.
1. Nvidia
Investors can rightly point out that Nvidia is trading at a lofty valuation following its surge this year. After all, the stock has a price-to-sales ratio of 27 and trailing earnings multiple of 65.
But the pace at which the company grew this year justifies the rich valuation. This is evident from the chart, which shows that Nvidia's revenue has grown at a faster pace than its sales multiple.
NVDA PS Ratio data by YCharts
Similarly, Nvidia's bottom-line growth has also been way faster than the increment in its earnings multiple.
NVDA PE Ratio data by YCharts
Not surprisingly, Nvidia stock is still considered cheap according to Wall Street analysts, especially considering that its forward earnings multiple is lower than other chipmakers, such as Intel and Advanced Micro Devices.
NVDA PE Ratio (Forward) data by YCharts
Buying Nvidia at its current valuation looks like a no-brainer, as the company is likely to deliver much stronger earnings growth than what consensus estimates predict. The semiconductor giant is expected to finish the current fiscal year with adjusted earnings of $11.28 per share, which would be a 237% increase over fiscal 2023. Analysts forecast a 67% increase in Nvidia's earnings in fiscal 2025 (which will begin in February 2024) to $18.81 per share.
However, in the past month, 44 analysts covering Nvidia stock have raised their earnings expectations for fiscal 2025. Just three months ago, Nvidia was expected to deliver $16.71 per share in earnings for the next fiscal year. It won't be surprising to see analysts raise their earnings expectations from Nvidia further, given that it is taking steps to tighten its grip over the AI chip market.
The company has lined up two powerful AI chips for release in 2024. The GH200 Grace Hopper Superchip is set to hit the market in the second quarter of next year. This chip platform combines Nvidia's Grace central processing unit (CPU) with the Hopper H100 GPU (graphics processing unit) and is also equipped with the latest generation of high-bandwidth memory. Nvidia points out that this chip platform will allow customers to train significantly bigger large language models (LLMs) and could help it maintain its lead over rivals.
NASDAQ: NVDA
Key Data Points
Also, Nvidia will release the H200 AI GPU in 2024. The company has received orders for this chip already, with major cloud service providers set to deploy it next year. These new chips could boost Nvidia's already-impressive pricing power, as they are upgrades over the current flagship, the H100, which reportedly carries an average price of $30,000. At the same time, Nvidia could witness a sharp increase in shipment volumes of its AI graphics cards next year, as the company is busy ramping up supply.
In simpler words, an uptick in unit sales and a potential jump in the average selling price could help Nvidia deliver much stronger earnings growth next year than what consensus estimates forecast. As a result, there is a good chance that Nvidia stock could keep rising in 2024 and deliver market-beating returns once again, which is why investors should look past its valuation and consider buying it before it heads higher.
2. Meta Platforms
Meta Platforms' eye-popping stock market surge is primarily a result of the solid growth the company has been delivering this year. In the third quarter, Meta's revenue increased 23% year over year to $34 billion, while earnings increased at a faster pace of 168% over the year-ago period to $4.39 per share.
NASDAQ: META
Key Data Points
Analysts forecast the company's 2023 revenue will increase 5% to $122.6 billion, followed by a stronger jump of 13% next year. This acceleration can be attributed to an improvement in digital ad spending next year, as well as Meta's focus on integrating more AI-enabled features into its social platforms to gain a bigger share of this market.
Global digital ad spending is expected to increase by 9% in 2024 to $740 billion. The company recently pointed out that it is testing over 20 ways to improve user experiences on Facebook, Messenger, Instagram, and WhatsApp with the help of generative AI.
This is in addition to the generative AI-powered features the company launched in October this year to help advertisers create images and backgrounds, as well as multiple copies of ads with varying texts. Meta will also help advertisers improve ad performance by helping them understand which variation of their ads is driving a better response. The company points out that these features will also help advertisers save at least five hours a week, as they will be able to delegate certain tasks to AI.
Given that the adoption of AI in the digital marketing space is anticipated to grow at an annual pace of 26% through 2030, Meta's strategy of integrating AI-powered features is likely to bear fruit in the long run. As such, it is not surprising to see that analysts anticipate a nice jump in the company's earnings in 2024.
META EPS Estimates for Next Fiscal Year data by YCharts
What's more, Meta's earnings could increase at an annual rate of almost 30% for the next five years. That would be a nice jump over the 8% annual earnings growth it clocked in the past five years. The market could reward Meta's improved earnings power with further solid stock price gains.
That's why investors would do well to buy this tech stock right now, as it is trading at 24 times forward earnings, a discount to the Nasdaq-100 index's forward price-to-earnings ratio of 28.
