Welcome to the race where the finish line always moves forward and the runners in the lead draw the map.
Amazon (AMZN 0.23%), Netflix (NFLX -0.83%)and Alphabet (GOOG -0.02%) (GOOGLE -0.09%) are set to add some oomph to the current bull market. Together these three FAANG Stocks represent around 8.1% of the S&P 500 (^GSPC 0.03%) indices cap-weighted score -- and all three appear to be ready to go in 2024.
When these giants dance, you can feel it all over Wall Street. So let's take a look at what will happen in 2024 and beyond.
1. Alphabet
Google's parent company is joining the rise of artificial intelligence (AI). Some critics expect the company to lose a significant amount of online search and advertising business to AI tools like OpenAI's ChatGPT, but Alphabet isn't sitting still in its digital hands.
For example, Google recently updated and renamed its Bard tool, similar to ChatGPT. Now known as Google Gemini, the advanced subscription-style version has analytical and creative powers comparable to ChatGPT.
Google is also integrating the Gemini AI model into popular online services like Gmail and Google Docs, while ChatGPT should rely on microsoft to add similar AI functionality in Office 365, Outlook and Bing. In my opinion, Google's access to mountains of valuable user data gives it an advantage that is difficult to overcome. competitive advantage that should make AI more of an opportunity than a challenge.
In addition, Alphabet shares remain under pressure due to the crisis affecting the entire digital advertising sector. High inflation and rising federal interest rates made consumers hold onto their wallets tighter, leading to less interest in generous advertising campaigns. Large marketing budgets simply don't make sense when no one is willing to buy your products.
I expect an impressive change in the fortunes of that industry in a short time. The inflation panic is fading and regulators are set to lower interest rates this year, and all those advertising buyers with limited budgets have a couple of years of innovation and product development to share with a more receptive consumer market.
With the economic environment poised to improve, Alphabet's advertising segment will rebound, benefiting from deferred marketing investments ready to be released. At the same time, the company is grabbing the AI โโchallenge by the horns and turning it in a useful direction. This confluence of technological leadership and improving market health offers an excellent opportunity for Alphabet to accelerate growth.
Alphabet, which represents 3.8% of the overall S&P 500 score, is one of the biggest difference makers in the market barometer. So when you see reports on the progress of the bull market, this stock plays a leading role in those market trends.
2. Amazon
The e-commerce and cloud computing giant is taking advantage of the same economic opportunities as Alphabet, but from a clearly different angle.
The recovery of Amazon's e-commerce business is already underway. Retail sales in North America increased 13% year over year in the recently reported Christmas 2023 quarter. International e-commerce sales increased by 17%. Operating profits are up and Amazon is raking in solid cash flows after a deep, dark inflationary lull.
Chart source: Amazon Q4 2023 earnings presentation.
And that bullish trend doesn't even take into account the star of the Amazon show: Amazon Web Services (AWS).
This incredibly lucrative business saw 13% revenue growth but a 38% increase in operating profits. AI services helped AWS generate 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 different layers. The platform's AI accelerators help customers build and train the AI โโengines behind their chatbots and large language models (LLM). AWS also provides access to existing LLMs through the Bedrock service. Finally, the Amazon Q tool (released so recently that it's still in limited preview mode) offers a ChatGPT-like interface with Amazon's AI product catalog.
As a leading provider of cloud-based computing services on a global scale, Amazon should be expected to make money from this multi-layered approach to the AI โโopportunity. Along with the recovery of electronic commerce, Amazon Stock Should Take Its Considerable Weight for the S&P 500 in 2024. Its market capitalization is one rounding error away from Alphabet's, resulting in an equivalent 3.8% share of the market index.
These massive workhorses have a lot of work to do in this bull run. Although I'm sure they're up to the task.
3.Netflix
Netflix is โโa 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 streaming media veteran is ready to climb positions in the coming years.
You're looking at a long-term growth stock in the midst of a major strategy change. Last year, co-founder and former CEO Reed Hastings handed the reins of Netflix to two trusted lieutenants: former content chief Ted Sarandos and chief operating officer Greg Peters. Under the new regime, Netflix is โโchanging its business model. The company, which once pursued subscriber growth at virtually any cost, is now aiming for profitable revenue growth and greater wealth. free cash flows instead.
The new plan includes some previously 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, which is currently about to offer free games to video subscribers, but probably preparing to offer a separate income stream pretty soon.
Investors initially didn't like the updated business plan, sending Netflix stock straight into Wall Street's bargain bin in 2022. However, after a steady stream of compelling updates on the impact of the ad-based plans and shared password conversions, the Netflix bears are calming down.
The stock chart is pointing skyward, with a 65% gain over the last year, but Netflix still appears undervalued. The company is more profitable than ever and its ambitions for long-term results are even greater. In 2024 and 2025, Netflix needs to convince skeptical investors that the new focus on profits is a good idea, just as it had to convince investors about the new focus on streaming media in 2011 and 2012.
That's why I expect Netflix to restore investor confidence and increase shareholder returns this year. That will be another significant contribution to the S&P 500's current bull run.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Alphabet executive Suzanne Frey is a member of The Motley Fool's board of directors. Anders Bylund It has positions in Alphabet, Amazon and Netflix. The Motley Fool has positions and recommends Alphabet, Amazon, Microsoft and Netflix. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
