The past year saw artificial intelligence-related stocks soar and become market favorites on Wall Street. But some top consumer-oriented companies quietly delivered market-beating gains and still have bright prospects.
Three Motley Fool contributors are here to offer timely picks that are poised for more gains in 2024 and beyond. Let's see why they like Carnival (CCL +0.45%), Chipotle Mexican Grill (CMG +0.95%), and Spotify Technology (SPOT +3.87%).
The tide is rising
Jeremy Bowman (Carnival): Carnival, the world's biggest cruise line, was quietly one of the top-performing stocks of 2023. While it hasn't gotten the attention that AI stocks have received, Carnival stock was up 131% by late December as business rebounded from the pandemic and is seeing record levels of demand.
NYSE: CCL
Key Data Points
The company just capped off fiscal 2023 with record revenue of $21.6 billion with positive adjusted net income of $1 million as it overcame more than $2 billion in interest expense. It also recorded its best booked position on record for both price and occupancy heading into 2024.
Carnival's financial position improved steadily over the course of 2023, reducing its debt balance by $4.6 billion from its peak in the first quarter to $30.6 billion at the end of the year. That stronger financial position, along with its record bookings, sets the stock up well for continued growth next year.
Travel demand remains strong heading into 2024 as forecasts call for continued spending on "revenge travel," or making up for lost time during Covid.Carnival should also be buoyed by the Federal Reserve's forecast for interest rate cuts, as lower interest rates would potentially allow it to refinance some debt at a lower rate and lower its payments on its variable-rate debt.
Looking ahead to 2024, Carnival expects adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to reach $5.6 billion, and it expects adjusted net income of $1.2 billion. Cruise lines tend to have high fixed costs and therefore high operating leverage, meaning that Carnival's margins should continue to expand as it gains leverage on fixed costs.
As it pays down debt and lowers its interest expense, the bottom line should also improve. If the company can hit its guidance and continues to experience strong demand, the stock should be rewarded in 2024.
Another year, another win for Chipotle Mexican Grill
Jennifer Saibil (Chipotle Mexican Grill): Chipotle has been a market-beating stock for a long time, and 2023 was no exception. It's closing out the year up 65%, and there's every reason to believe it can keep it up next year.
The fast-casual restaurant chain sits at the sweet spot between fast food and formal dining, with matching prices. While companies often falter when trying to get between segments, Chipotle has carved out a niche that meets demand from a variety of consumer bases. It's popular with affluent consumers while still being cheaper, which is why it's been resilient despite inflation.
Its prices aren't too astronomical to impede mass clientele, but it has been able to successfully raise prices to combat higher costs without curbing demand.
NYSE: CMG
Key Data Points
Revenue increased 11% in the 2023 third quarter, with comparable sales (comps) up 5%. Operating margin widened from 15.1% to 16%, and earnings per share rose from $9.20 to $11.32. In other words, it was another great quarter for the burrito king, and it's expecting to keep it up.
The restaurant chain is guiding for comps growth of mid- to high single digits in the fourth quarter and for the full year. As inflation moderates and people begin to spend on more expensive products and services, which could happen very quickly, Chipotle should reflect that in its performance.
Chipotle already operates more than 3,300 restaurants, all company-owned, but it sees the opportunity to reach 7,000 stores, giving it a long growth runway. Since many urban areas, where its core customers live, are already saturated, it's been opening new stores in underpenetrated areas like suburban towns. It's also focusing on international growth, particularly in Canada.
Aside from the revenue growth that comes with new stores, it typically demonstrates robust comparable sales increases, in addition to efficiency. It's reliable for excellent performance under almost any circumstances, which is why investors love this forever stock.
Spotify is blasting expectations
John Ballard (Spotify Technology): The leading music streaming service found its legs after a brutal outing in 2022 as strong revenue growth sent the stock soaring off its lows, up 148% in 2023. Spotify has plenty in the tank to keep the momentum going.
Spotify is winning over new users in droves with its personalized playlists, including the new AI DJ, audiobooks, and more. Management expected to add over 20 million net subscribers in 2023 but is on pace to reach 30 million through the fourth quarter.
NYSE: SPOT
Key Data Points
The stock has responded to the company's improving growth and still offers attractive upside. It's always important to put aside the stock's past performance and focus on its valuation. Spotify stock still trades at a forward price-to-sales ratio of 2.5 using Wall Street's revenue estimate for the full year. That is well below Spotify's previous peak P/S ratio of around 6 earlier during the pandemic and is also below other streaming stocks like Netflix, which trades at 6.4 times sales.
Spotify will have to improve margins and overall profitability to earn a higher valuation, but it seems capable of doing so. The strong demand for its music service is starting to lift gross profit margin. Spotify generated $228 million in free cash flow in the third quarter, and management expects more improvement from here.
Long term, Spotify could see more demand as new AI tools help it get even better at curating playlists and other content for users. The platform has 574 million monthly active users, but it's on track to reach management's target of 1 billion by 2030.
