The Nasdaq Composite (^IXIC 1.59%) is 16 months into a bull market and the index has already soared 53%, but history says it could move much higher in the next couple years. The Nasdaq returned an average of 215% during the eight bull markets since 1990, and it realized those gains over an average of 40 months.
If the current bull market aligns with that average, the Nasdaq will gain another 162% during the next two years. That implies annual returns above 60%, which is highly unlikely given the economic uncertainty. But whichever direction the wind blows in the near term, history says the index is headed much higher in the long term. The Nasdaq returned 15% annually over the last decade and similar results are likely during the next decade.
Investors hoping to capitalize on that momentum should buy a few shares of Amazon (AMZN 2.61%) and The Trade Desk (TTD 1.75%). Here's why.
NASDAQ: AMZN
Key Data Points
1. Amazon
Amazon has a strong presence in three major markets -- e-commerce, digital advertising, and cloud services -- and the company is gaining share in two of them. Specifically, it accounted for 39.6% of online retail sales in the United States last year, up 130 basis points (1.3 percentage points) from the prior year. It also accounted for 7.6% of global digital ad spending, up 80 basis points. That makes Amazon the largest e-commerce company in the U.S. and the third largest digital advertising company worldwide.
Meanwhile, Amazon Web Services (AWS) accounted for 31% of cloud infrastructure and platform services revenue in the fourth quarter, down two points from the previous year. However, AWS still leads the market, outranking second-place Microsoft Azure by seven points, according to Synergy Research. Dominance in cloud services means AWS is ideally positioned to benefit as businesses spend more on artificial intelligence.
Amazon reported fourth-quarter financial results that beat the consensus estimates on the top and bottom lines. Revenue rose 14% to $170 billion as growth accelerated sequentially across every business segment except physical stores. Operating margin expanded 600 basis points and GAAP net income was $1.00 per diluted share, up from $0.03 per diluted share in the prior year. Investors should expect similar sales momentum in the coming quarters.
Indeed, Wall Street expects Amazon to grow sales at 11% annually over the next five years. That consensus estimate leaves room for upside if the company reclaims lost market share in cloud computing, a distinct possibility given its focus on AI product development. However, the current valuation of 3.3 times sales is reasonable even if the consensus sales forecast is correct.
As a final thought, JPMorgan Chase analysts selected Amazon as their "best idea" among internet stocks in 2024. More broadly, the stock carries a consensus rating of "buy" among Wall Street analysts, and its median one-year price target of $215 per share implies 20% upside from its current price of $179 per share.
NASDAQ: TTD
Key Data Points
2. The Trade Desk
The Trade Desk operates the leading independent ad tech platform for media buyers. Its software helps brands and their advertising agencies plan, measure, and optimize digital campaigns. The company has embedded its platform with sophisticated machine learning and measurement capabilities, which help media buyers spend their ad budgets more effectively.
The Trade Desk's independence -- meaning it does not own media content that could bias its behavior toward specific ad inventory -- has helped the company build trust with media buyers, such that its customer retention rate has exceeded 95% for the past decade. Its independence and scale has also led to partnerships with publishers (media sellers) in ways that would be impossible for competitors like Alphabet's Google.
For instance, The Trade Desk provides the underlying technology that powers Walmart's ad tech platform, a job that would never be entrusted to a competiting publisher like Google. The Trade Desk also sources data from many more of the world's largest retailers, including Target, Albertsons, and Walgreens, but those publishers are less likely to share information with competitors like Google. The upshot is The Trade Desk has access to robust data that not only affords its platform unique measurement capabilities, but also theoretically gives the company an edge in training the machine learning models that inform decision-making.
The Trade Desk reported solid financial results in the fourth quarter. Revenue rose 23% to $606 million and GAAP net income increased 36% to $0.19 per diluted share. On the earnings call, Jeff Green said The Trade Desk has gained market share for eight consecutive quarters, and he expects the company to continue gaining share. Management also guided for revenue growth to accelerate to 25% in the first quarter.
Going forward, The Trade Desk is well positioned to maintain that momentum due to its strong presence in connected TV advertising and retail media, two of the fastest-growing channels in the broader digital advertising market. Indeed, Wall Street expects the company to grow sales at 20% annually over the next five years. In that context, its current valuation of 20.8 times sales is tolerable, especially when the three-year average is 24.9 times sales. But investors should start with a small position.
As a final thought, The Trade Desk stock carries a consensus rating of "buy" among Wall Street analysts, and its median one-year price target of $100 per share implies 24% upside from its current price of $80.50 per share.
