Investors generally agree that 2022 will go down in history as a challenging one for the markets, but it appears the worst has passed. After falling more than 35% in 2022 -- the worst decline in more than a decade -- the Nasdaq Composite charged off the blocks in 2023, gaining 41% so far this year (as of market close on Wednesday).
Students of investing history will know the market likely has further to run. Going back to 1972 -- the first full year of trading for the Nasdaq -- in each year following a bear market rebound, the tech-centric index has climbed 19% on average, which suggests the current uptrend has room to run.
Furthermore, the recent revival of stock splits has investors poring over companies that have split their shares in recent years, as this is normally preceded by years of robust growth. Let's look at two companies that meet the criteria and should be on investors' short lists.
Image source: Getty Images.
1. Alphabet
One company that should be on investors' radars is Alphabet (GOOGL -3.37%) (GOOG -3.33%). The stock has gained 415% over the past 10 years, causing the company to initiate a 20-for-1 stock split in mid-2022. Despite the challenges it faced over the past couple of years, Alphabet has a history of robust financial growth, and 2024 will likely prove to be more of the same.
The biggest challenge in 2022 was the steep and rapid decline in online advertising, which generates the lion's share of Google's revenue, but the industry appears to have turned the corner.
Digital advertising is expected to grow 11% in 2023, according to advertising strategist Madison and Wall. Alphabet is the online advertising leader, controlling roughly 30% of the worldwide market, according to data collated by online marketing trade publication Digiday. As such, Alphabet is well positioned to ride that tailwind higher.
Global cloud infrastructure spending is rebounding, up 16% to $73.5 billion in the third quarter, according to research company Canalys. During the same period, Google Cloud revenue climbed 24% year over year, achieving a market share of 10%. This is Alphabet's second most important growth driver, so the ongoing rebound is a welcome development.
Furthermore, Alphabet was quick to pounce on the opportunity represented by generative artificial intelligence (AI), which brings with it the promise of greater productivity for its users. As one of the "Big Three" cloud providers, Google Cloud offers the perfect venue to offer AI services to its cloud customers.
Speaking of AI, Alphabet has also been quick to infuse many of its most popular products and services with AI functionality and recently released its Gemini AI, which outperforms ChatGPT using a variety of widely used benchmarks.
The recovery of digital advertising fueled by its industry-leading search, a rebound in cloud computing, and the opportunity represented by AI provides a compelling case for Alphabet. Here's another reason to buy: The stock is currently selling for 5 times forward sales, a significant discount to its three-year average of 6 times sales. That suggests Alphabet is a bargain when viewed through the lens of its large and growing opportunity.
2. Nvidia
Another stock-split stock investors should have on their shortlist is Nvidia (NVDA 0.03%). The stock has surged 12,420% over the past decade, causing the company to initiate a stock split in mid-2021. And there looks to be much more where that came from.
Nvidia pioneered graphics processing units (GPUs), which render realistic images in video games, but that was just the beginning. As a result, Nvidia has long been the leader in the discrete desktop GPU space, with more than 80% of the market.
But that was just the beginning. CEO Jensen Huang realized the significant potential to expand the use cases of parallel processing by the GPU, which can conduct a multitude of complex mathematical computations simultaneously. Parallel processing also proved the be a perfect match for the rigorous computational horsepower needs of data centers, helping speed data through the ether. By some accounts, Nvidia controls as much as 95% of the market for data center GPUs, according to CFRA Research analyst Angelo Zino.
With the dawn of AI, Nvidia was able to pivot quickly, offering not only the processors necessary to get the job done, but also the accompanying software that make them work seamlessly. That gave the company the lead in machine learning, an earlier branch of AI. Nvidia controls as much as 95% of that market, according to New Street Research.
Generative AI represented another test for Nvidia, and the company showed that it was more than up to the challenge. Nvidia just released the HGX H200, specifically designed for the rigors of generative AI and high-performance computing (HPC). Nvidia says the processor delivers "nearly double the capacity and 2.4x more bandwidth compared with its predecessor, the Nvidia A100."
The data center upgrade cycle and the accelerating demand for AI have supercharged Nvidia's results so far this year. For its fiscal 2024 third quarter (ended Oct. 29), data center revenue -- which includes processors used for AI -- soared 279% year over year to a record $14.5 billion, and management believes another record-setting quarter is coming due to the persistent demand for AI.
Many investors cite Nvidia's lofty valuation of 63 times earnings and 27 times sales as a reason to avoid the stock -- that those metrics fail to take the company's triple-digit growth into account. However, the more appropriate price/earnings-to-growth ratio (PEG ratio) -- which takes that into account -- comes in at less than 1, compared to more than 2 for the S&P 500, showing that Nvidia is extraordinarily cheap compared to its prospects.
