The U.S. stock market saw an impressive performance in 2023, with benchmark indexes such as the S&P 500, the Nasdaq Composite, and the Dow Jones Industrial Average reporting gains of 24.2%, 43.4%, and 14%, respectively. This was a commendable feat, considering that the year was also marked by exacerbated worries about rising inflation and the possibility of the U.S. defaulting on its debt.
Although the current inflation level in the U.S. remains above the Federal Reserve's annual target of 2%, it has eased significantly from that at the start of 2023. Subsequently, the central bank has suggested three rate cuts in 2024. This bodes well for the entire stock market, including many of the Dow stocks, such as Microsoft (MSFT 1.82%) and Visa (V -0.23%). Here's why these two stocks look well-positioned to soar in 2024 and beyond.
1. Microsoft
Technology titan Microsoft has built a diversified business catering to both enterprise and consumer clients. While previously well-known mainly for its Windows operating system and Office productivity suite, the company has been in the news lately for its Azure cloud computing platform, gaming business, and partnership with ChatGPT developer OpenAI. Microsoft's strategy of integrating AI capabilities across its entire technology stack has now started bearing fruit.
While Azure saw a slowdown in the wake of enterprises optimizing their cloud spending in 2022 and early 2023, the impact of the optimization cycle has somewhat normalized now. Azure, however, is now benefiting from higher-than-expected demand for its AI services.
Azure is also seeing a significant expansion of its customer base thanks to its comprehensive footprint (60 data center regions worldwide), increased GPU capacity, the introduction of next-generation virtual machines based on Nvidia's H100 AI chips, and access to several proprietary and open-source large language models for customized application development. In addition, Azure OpenAI service is already being used by more than 18,000 organizations, which also includes new-to-Azure customers.
Microsoft's office productivity business is continues to be a major growth catalyst. Customers are increasingly preferring cloud-based Microsoft 365 subscriptions over perpetual licenses. In the third quarter, Microsoft 365 commercial revenue rose year over year by 18%. This was driven by a healthy pace of subscription renewals and a rise in average revenue per user associated with robust demand for Microsoft 365 E5 offerings (advanced security, compliance, voice, analytics).
Further, Microsoft has integrated its AI assistant Copilot into the Microsoft 365 ecosystem, GitHub, and Outlook. The company is leveraging cutting-edge generative AI technology in Copilot to automate and manage diverse business tasks. Priced at $30 per user per month, Microsoft 365 Copilot can bring in significant revenue for the company in the coming months.
With several secular tailwinds, Microsoft is a top pick for 2024.
2. Visa
An undisputed leader in the global payment landscape, Visa demonstrated remarkable resilience in 2023 -- a year marked by high inflation and significant economic uncertainty. Revenue was up by 11% year over year in its fiscal 2023 (ended Sept. 30). The company completed 276 billion transactions in fiscal 2023, while Visa credentials were used 757 million times a day.
Visa has managed to differentiate itself from the competition based on its extensive global payment network, which includes 130 million merchants and nearly 14,500 financial institutions. The company has also signed nearly 500 commercial partnerships with fintech players in fiscal 2023, up 25% on a year-over-year basis. This has enabled the company to expand its geographic reach and penetrate new markets and customer segments.
Further, unlike many prominent financial players, Visa is not involved in the direct lending business and instead focuses only on payment facilitation. The company operates a relatively asset-light business model, since capital is not required to cover potential delinquencies.
Visa is focusing on strengthening its consumer payment business by making the system more secure and increasing overall customer engagement. The company further sees huge scope in areas such as peer-to-peer payments, cross-border remittances, and emerging payment flows, as well as in underbanked regions of the Middle East, Africa, and Southeast Asia.
The company is also investing in innovative solutions for risk management, fraud detection and prevention, and tokenization -- which are helping minimize liability for e-commerce merchants. All these initiatives can further help strengthen Visa's overall business.
It is undeniable that Visa is a cyclical stock, heavily dependent on consumer spending and transaction volumes. However, with investors being quite optimistic about the economy in 2024 (due to cooling inflation, possible rate cuts, and a corporate earnings rebound), Visa could prove to be a compelling pick now.
