2024 is just getting started. With the new year comes new hopes for the future, a new tax year, and new opportunities to invest in the trends that will define our future.
With high hopes for a great potential future in mind, three Motley Fool contributors went looking for companies that looked like they had the potential to win in 2024. They picked Realty Income (O 0.77%), Confluent (CFLT 0.02%), and Microsoft (MSFT +0.34%). Read on find out why and decide for yourself whether any of them may deserve a spot in your portfolio this year.
Image source: Getty Images.
This real estate titan is poised for a great comeback
Eric Volkman (Realty Income): I've been a bull on star real estate investment trust (REIT) Realty Income forever, but in 2023 other investors had a different view. As the S&P 500 index rose by more than 24% over the year, Realty Income's share price slumped by 9%.
NYSE: O
Key Data Points
On the face of it, there wasn't much reason for the market to shun the stock. Fueled by its strong portfolio, plus acquisitions both of fellow REITs and attractive retail properties individually, Realty Income showed notable growth in key metrics throughout 2023.
The company's third quarter was typically strong, with its adjusted funds from operations -- the most important profitability line item for REITs -- leaping nearly 20% higher year over year.
But investors were worried about the state of the global and domestic economy throughout 2023. If they held assets in companies dependent on debt financing, they were particularly worried. While the feverish, inflation-fighting central bank rate hikes are quickly becoming a thing of the past, they are still high relative to the microscopic levels of the pre-pandemic years.
No matter how successful or struggling, nearly all REITs (and most large-scale buyers and developers of real estate, come to think of it) need debt financing. Purchasing and developing buildings is a ferociously expensive job, and can quickly drain capital if not done with good strategy and care. Those lofty rates were spooking potential REIT investors, and many remain skittish.
The good news is that, at least in the U.S., interest rates look very likely to get a few haircuts next year. The Federal Reserve has stated that it intends to do some chopping, following notable declines in several recent inflation data sets.
Even without such an assist from the Fed, Realty Income will grow ever larger. At the end of October it announced yet another big-ticket acquisition, the $9.3 billion deal for peer REIT Spirit Realty Capital. This buy has several very attractive aspects for Realty Income shareholders, not least that it's being paid for entirely in stock (as opposed to precious capital).
Despite its good fundamental performance, 2023 wasn't Realty Income's year. The story should be much different, and in a highly positive way, in 2024.
Making the transition
Jason Hall (Confluent): The transition to the cloud is ongoing, and companies are further shifting how they leverage the data they have and are sending there. Tools that allow organizations to stream their data in real time are unlocking more robust analytics and nimbleness versus legacy batch reporting that may be too little or too late with insights.
According to Gartner, the market Confluent is serving will grow from an already robust $60 billion in 2022 to $100 billion in 2025, and keep growing from there. Confluent was literally built for this transition, founded by the creators of the de facto industry standard open-source streaming tool, Apache Kafka. Confluent went public in 2021, leveraging the euphoric initial public offering (IPO) market to raise significant capital to supercharge its growth. That's paid off over the past few years, with the company's revenue more than tripling since 2021, while gross margin has grown even faster:
NASDAQ: CFLT
Key Data Points
CFLT Revenue (TTM) data by YCharts
But like other software-as-a-service (SaaS) start-ups, it's been a cash-burning machine, sending the stock down by half since its debut and more than 75% from the high:
But like its customers making the transition to data streaming, Confluent is shifting from money burner to cash cow. After free-cash-flow burn increased every year since the company's IPO, that number began shrinking two quarters ago, and management is now guiding to be cash-flow-neutral in 2024. Based on that trajectory, investors should expect to see Confluent start gushing cash in the years to follow.
With $1.8 billion in cash on its balance sheet and a massive, growing, high-margin market to take share from, Confluent is set to win in 2024 and beyond.
I, for one, welcome our new AI overlords
Chuck Saletta (Microsoft): In a late 2023 poll conducted by ResumeBuilder, just over half of responding companies indicated that they were already using artificial intelligence (AI) in their businesses. And of those that did, over a third used their AI to replace workers. That same survey indicates that in 2024, nearly 80% of those companies will be using AI, and almost half of them think AI will lead to even more layoffs this year.
OpenAI's ChatGPT was the AI launch with the biggest public splash, and Microsoft's partnership with OpenAI certainly sets it up to be an early mover in the generative/language-based AI space. That said, while ChatGPT may be getting a bunch of the press, Microsoft's AI work is clearly taking root beyond just that specific implementation.
NASDAQ: MSFT
Key Data Points
In particular, Microsoft's recently released Copilot system is designed to enable a fairly seamless tie-in of multiple types of AI services and solutions. That integrated, end-to-end approach gives the company a great opportunity to really help multiply the impact that a smaller number of AI-enabled employees can drive.
One of the limitations with traditional AI solutions is that they tend to do one thing -- whatever it is they're trained for -- really well. They tend to fail miserably at other tasks, and if later trained for those other tasks, they then "forget" what it was that they had originally been trained on. That often leads to AI, no matter how good it can be, getting used primarily for limited and well-defined roles.
With Copilot, Microsoft appears to be tying together multiple different AI models under one interface, thus sidestepping that "forgetfulness" problem. Rather than trying to have one model do it all, Copilot makes it easier to use the right model for the job, with the behind-the-scenes complexity of the multiple models more or less hidden.
Unless and until a general purpose artificial intelligence becomes a reality, Microsoft's Copilot approach might very well be the best way to drive the sort of major office productivity that companies expect. If AI-driven layoffs become as widespread as ResumeBuilder's survey thinks they might, it makes sense to consider an investment in a business that stands to profit from that trend.
Make 2024 your year to shine
Whether or not Realty Income, Confluent, or Microsoft make the cut to deserve a spot in your portfolio, now is the time to consider what you think the big drivers of 2024 will be. If you can pick out and invest those drivers before they become obvious to everyone in the market, then you just might be able to look back at the end of the year and smile at just how well the year will have treated you.
