Welcome to the race where the finish line is always moving forward, and the front-runner racers get to draw the map.
Amazon (AMZN 3.43%), Netflix (NFLX -0.63%), and Alphabet (GOOG 9.96%) (GOOGL 10.22%) are poised to add some oomph to the current bull market. Together, these three FAANG stocks account for about 8.1% of the S&P 500 (^GSPC 1.02%) index's cap-weighted score -- and all three look ready to run in 2024.
When these giants dance, you can feel it all over Wall Street. So let's take a look at what they have going on in 2024 and beyond.
1. Alphabet
Google's parent company is hitching its wagon to the artificial intelligence (AI) boom. Some critics expect the company to lose a significant amount of online search and advertising business to AI tools such as OpenAI's ChatGPT, but Alphabet isn't sitting on its digital hands.
For instance, Google recently upgraded and renamed its ChatGPT-like Bard tool. Now known as Google Gemini, the subscription-style Advanced version has analytic and mock-creative powers comparable to ChatGPT.
Google is also integrating the Gemini AI model into popular online services like Gmail and Google Docs, while ChatGPT must rely on Microsoft to add similar AI functionality into Office 365, Outlook, and Bing. In my eyes, Google's access to mountains of valuable user data gives it a hard-to-beat competitive advantage that should make AI more of an opportunity than a challenge.
Furthermore, Alphabet's stock is still under pressure from the sector-wide downturn in digital advertising. High inflation and rising federal interest rates made consumers hold on to their wallets tighter, which led to lower interest in generous advertising campaigns. Big marketing budgets just don't make sense when no one is ready to buy your products.
I expect an impressive swing in that industry's fortunes before long. The inflation panic is fading out, and regulators are ready to lower interest rates this year -- and all those ad buyers with limited budgets have a couple of years' worth of innovation and product development to share with a more receptive consumer market.
With the economic environment poised for improvement, Alphabet's advertising segment is set to rebound, benefiting from deferred marketing investments ready to be unleashed. At the same time, the company is grabbing the AI challenge by the horns and twisting it in a helpful direction. This confluence of technological leadership and improving market health offers a prime opportunity for Alphabet to accelerate growth.
Accounting for 3.8% of the S&P 500's overall score, Alphabet is one of the market barometer's largest difference-makers. So when you see reports of the bull market's progress, this stock plays a leading role in those market trends.
2. Amazon
The e-commerce and cloud computing giant taps into the same economic opportunities as Alphabet, but from a distinctly different angle.
The recovery in Amazon's e-commerce business is already well underway. North American retail sales rose 13% year over year in the recently reported holiday quarter of 2023. International e-commerce sales increased by 17%. Operating profits are up, and Amazon is collecting robust cash flows after a deep, dark inflation lull.
Chart source: Amazon's Q4 2023 earnings presentation.
And that bullish trend doesn't even account for the star of the Amazon show -- Amazon Web Services (AWS).
This incredibly lucrative business saw 13% revenue growth but a 38% jump in operating profits. AI services helped AWS deliver these impressive profits. The earnings release included 12 examples of large AWS deals executed in the fourth quarter, and 10 of them included an AI component.
The company takes advantage of the generative AI frenzy in three distinct layers. The platform's AI accelerators help customers build and train the AI engines behind their chatbots and large language models (LLMs). AWS also provides access to existing LLMs through the Bedrock service. Finally, the Amazon Q tool (so recently launched that it's still in limited preview mode) offers a ChatGPT-like interface with Amazon's catalog of AI products.
As a leading provider of cloud-based computing services on a global scale, you should expect Amazon to make a mint from this multilayered approach to the AI opportunity. Paired with the e-commerce recovery, Amazon's stock should pull its considerable weight for the S&P 500 in 2024. Its market cap is a rounding error away from Alphabet's, resulting in an equal-sized 3.8% share of the market index.
These massive workhorses have a lot of work to do in this bull run. I'm sure they're up to the task, though.
3. Netflix
Netflix is a smaller business, with a more modest 0.5% impact on the S&P 500 index. However, a top-30 position in the index is nothing to sneeze at, and I think the media-streaming veteran is poised to climb the ranks over the next couple of years.
You're looking at a long-term growth stock in the middle of an important strategy shift. Last year, co-founder and longtime CEO Reed Hastings handed off Netflix's reins to two trusted lieutenants -- former content chief Ted Sarandos and chief operating officer Greg Peters. Under the new regime, Netflix is shifting its business model. Formerly chasing subscriber growth at pretty much any cost, the company now aims for profitable revenue growth and richer free cash flows instead.
The new plan includes a few formerly controversial ideas. Subscribers now have access to a lower-priced access plan supported by commercials. The company is cracking down on password-sharing. There's even a video game business in the works, currently going through the paces of offering free games to video subscribers, but probably gearing up to deliver a separate revenue stream fairly soon.
Investors didn't love the updated business plan at first, sending Netflix's stock straight to Wall Street's bargain bin in 2022. However, after a steady stream of good-looking updates on the impact of ad-based plans and password-sharing conversions, the Netflix bears are calming down.
The stock chart is pointing skyward, with a 65% gain over the last year, but Netflix still looks undervalued. The company is more profitable than ever, with even greater bottom-line ambitions in the long run. In 2024 and 2025, Netflix needs to convince skeptical investors that the new profit focus is a good idea -- much like it had to sell investors on the new media-streaming focus in 2011 and 2012.
That's why I expect Netflix to rebuild investor confidence and boost shareholder returns this year. That'll be another significant contribution to the S&P 500's ongoing bull run.
