While 2023 saw some artificial intelligence (AI) companies skyrocket, there will be plenty more that see their stocks rise in 2024. One of the critical industries to watch is cloud computing, as these servers are needed for two reasons. First, they can provide the impressive computing power needed to create AI models. Second, these servers can also store the massive amount of data needed to feed these models.
Two of the biggest players in this space are Amazon (AMZN -0.40%) and Alphabet (GOOG -1.05%) (GOOGL -1.09%). While each stock had a strong 2023, the tailwinds provided by their exposure to cloud computing will push them much higher in 2024.
1. Amazon
Amazon last split its stock in June 2022, when each share turned into 20. With the stock trading around $145, we're likely a long way off from another stock split, but after a strong year, management may consider it.
While many know Amazon from its e-commerce business, it has become more of a service investment in the past five years. Among these services is Amazon Web Services (AWS), its cloud computing offering. AWS currently has the largest cloud computing market share, controlling an estimated 32% of the market (compared to Alphabet's Google Cloud's 11% and Microsoft Azure's 22%), according to Synergy Research Group.
As of late, AWS has been losing market share, as it hasn't posted great results in 2023. On a currency-neutral basis, AWS' last four quarters of growth rates looked like this:
| Quarter | Growth Rate |
|---|---|
| Q4 2022 | 20% |
| Q1 2023 | 16% |
| Q2 2023 | 12% |
| Q3 2023 | 12% |
Data source: Amazon. Table by author.
Compared to its chief rivals, which have consistently posted growth rates above 20% in 2023, AWS is being left behind. But that could change in 2024.
On its Q3 conference call, management discussed the cause of the slowdown: workload optimization. Customers were inefficient in their AWS usage, so instead of risking losing clients to competitors, Amazon stepped in to help optimize spending, which caused growth headwinds.
However, management has evidence that this trend is nearly wrapped up, as they signed deals effective in October that were equivalent to all the deals signed throughout Q3. With new AI workloads coming online, AWS is slated to have a strong 2024.
AWS is one of the most profitable parts of Amazon's business, as it posted 30% operating profit margins in Q3. Should AWS have significant growth in 2023, this will drastically help Amazon's profits, setting the stock up to have a great 2024.
2. Alphabet
Alphabet also split its stock 20 for one, about the same timeframe as Amazon in July 2022.
While Alphabet's Google Cloud experienced the same slowdowns in 2023, it was not as affected as Amazon. Furthermore, the Google Cloud division is highly leveraged to AI workloads, as over half of generative AI start-ups are Google Cloud customers. With Google Cloud growing at a 22% pace, it's doing quite well.
However, it's not optimized for profits quite yet. Alphabet was a bit late to the cloud computing market, so it hasn't had time to become massively profitable (like AWS). In Q3, Google Cloud posted an operating margin of 3.2% -- a far cry from AWS' 30% margin.
Should Google Cloud achieve the same 30% margin as AWS, it would add 12% to Alphabet's total operating profits. That's a solid gain just by optimizing for profits, but don't expect management to do that in 2024. They see a massive market opportunity, and with Google Cloud growing at a 20% or greater pace throughout 2024, this effect will compound over time.
Even with that boost in its back pocket, Alphabet trades at a reasonable price.
GOOGL PE Ratio (Forward) data by YCharts
With Alphabet having other AI investments, like its groundbreaking Gemini generative AI model, it's set up to have a strong 2024, making it a great candidate for a stock that can crush the market in 2024.
