Sunday, February 25, 2024

Bullish Outlook for Amazon and Nvidia After Strong Stock Gains in 2023

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Bullish Outlook for Amazon and Nvidia After Strong Stock Gains in 2023

After suffering through the worst stock market performance in over a decade during 2022, investors finally have reason for optimism as we head into 2023. The S&P 500 has already climbed 25% from its bear market lows and now sits less than 6% shy of reclaiming its all-time highs. Once the index moves above that previous peak, it will officially signal the start of a new bull market.

While many stocks are still struggling to regain momentum, a select group of mega-cap technology stocks dubbed the “Magnificent Seven” have massively outperformed the broader markets so far this year. These seven stocks include Alphabet (up 51%), Amazon (up 72%), Apple (up 44%), Meta Platforms (up 180%), Microsoft (up 54%), Nvidia (up 240%), and Tesla (up 93%).

Remarkably, even after ranking as some of 2023’s biggest gainers to date, analysts see two of these red-hot tech stocks still having substantial upside ahead. Over the next 12 to 18 months, they predict Amazon could surge another 58% while Nvidia could deliver jaw-dropping gains of 122%.

What factors are driving this overwhelmingly bullish outlook for Amazon and Nvidia stocks even after their parabolic ascents so far this year? Let’s take a deeper look at why analysts remain so optimistic about both companies’ prospects from here.

Amazon Poised to Be a Major Beneficiary of Economic Recovery

One of Amazon’s biggest advantages is the diversified business model it has built over the past two decades. Today, Amazon holds commanding leadership positions across numerous high-growth sectors including e-commerce, cloud computing, digital advertising, streaming video, artificial intelligence, voice-activated technology, and more. This diverse array of fast-expanding revenue streams positions Amazon extremely well to thrive as economic and market conditions improve.

In the core e-commerce segment that made Amazon an household name, the company still accounts for an astonishing 38% of all online retail transactions in the United States. To put Amazon’s dominance in context, that share is larger than the next 14 biggest online retailers combined, according to data provider Statista. As inflation continues cooling and consumers open up their wallets again, Amazon as the undisputed king of e-commerce is poised to capture an outsized portion of the rebound in retail spending.

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Another massive growth avenue is cloud computing, where Amazon Web Services has similarly obtained an enviable market share despite intensifying competition. AWS still controls nearly 30% of the global cloud infrastructure services market according to estimates by Canalys Research. With rising demand for cloud-based artificial intelligence capabilities fueling expansion in this market, AWS has a long runway for sustained growth by leveraging its industry leadership.

Even after this year’s huge share price run-up, some analysts remain exceedingly bullish on Amazon’s prospects. Redburn Partners analyst Alex Haissl maintains a buy rating on the stock with a price target of $230, implying 58% upside from current levels. Haissl believes investors are underestimating the speed at which Amazon’s revenue growth can reaccelerate. In his view, “The outlook for Amazon is exceptional.”

Wall Street analysts overwhelmingly share Haissl’s enthusiasm. Among 53 analysts covering the stock, 51 have buy or strong buy recommendations, with not a single sell rating.

Adding to the bull thesis, Amazon stock still looks reasonably valued trading at just about 2 times expected sales for 2024. While not quite the screaming bargain it was during 2022’s lows, the current valuation remains near the cheapest levels seen since 2016. For a proven long-term market leader like Amazon, the premium is certainly justified.

Nvidia’s AI Leadership Positions It to Dominate Generative AI Growth

Another mega-cap tech stock analysts are extremely bullish on is Nvidia, thanks to its dominant position capitalizing on explosive growth in artificial intelligence. Nvidia’s graphics processing chips have long represented the gold standard for AI computing. With the company’s brand new H100 Hopper processor unveiled in recent weeks, Nvidia has extended its technology lead in the red-hot AI hardware space.

Demand for Nvidia’s AI capabilities is absolutely soaring currently, as reflected in its latest financial results. For the fiscal second quarter ended July 2022, Nvidia delivered record quarterly revenue of $13.5 billion which rocketed higher by 101% compared to the prior year period. The company’s earnings per share hit $2.48, skyrocketing 854% year-over-year.

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Revenue in Nvidia’s data center segment, which includes sales of AI processors, grew at an astounding 171% annually. This growth is being driven by the extremely rapid adoption of generative AI models like ChatGPT across both consumer and enterprise applications.

Looking ahead, Nvidia expects continued blockbuster results next quarter with guidance calling for revenue potentially topping $16 billion, a mind-boggling increase of over 300% versus the same quarter last year. Soaring demand for AI capabilities remains the primary fuel for Nvidia’s jaw-dropping growth.

Even in the face of the stock’s incredible 244% surge year-to-date, some analysts believe substantially more upside lies ahead. Rosenblatt Securities analyst Hans Mosesmann maintains a buy rating on Nvidia shares with an eye-popping price target of $1,100, suggesting an additional 122% gain from current levels.

Mosesmann points to Nvidia’s triple-digit revenue expansion in recent quarters and similar growth expected in the coming periods as “unprecedented.” He sees generative AI driving a long-term paradigm shift, creating a massive long-term growth runway for Nvidia’s technology. In his view, “the data center market is in the midst of a paradigm shift to support high-performance computing and generative AI, giving Nvidia a long runway for growth ahead.”

Echoing the bullish sentiments on Amazon, Wall Street analysts are nearly unanimous on their enthusiasm for Nvidia. Among 53 recent analyst ratings compiled by TipRanks, 50 were buy or strong buy recommendations while not a single one advised selling the stock.

It’s true that at about 45 times forward earnings estimates, Nvidia stock is no bargain. But with triple-digit earnings growth, Nvidia has seen its P/E multiple contract rapidly and deserves a premium valuation. If the company can sustain this torrid growth pace as analysts expect, the P/E should moderate further. With the AI revolution still in its early innings, Nvidia has secular tailwinds supporting many more years of superior growth.

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Key Factors Investors Should Monitor

Clearly the long-term outlook appears quite bright for both Amazon and Nvidia, having both reclaimed leadership positions in massive secular growth markets. However, risks certainly remain, especially related to broader economic conditions.

While inflation continuing to cool and potential interest rate cuts in 2023 are encouraging signs, the threat of recession still looms over markets. If consumers pull back more aggressively on spending, it could crimp Amazon’s e-commerce volumes. For AWS, economic weakness diminishing business technology investments could slow cloud revenue growth.

For Nvidia, demand for data center and AI offerings has historically been more resilient to economic fluctuations than other segments. But an especially painful downturn would likely still impact budgets for new server build-outs and upgrades.

Investors will gain more clarity on these dynamics when Amazon and Nvidia each report Q4 2022 earnings results in coming weeks. Holiday e-commerce sales trends will offer an important gauge of consumer strength for Amazon. Market observers will watch closely for any signs of slowing momentum.

But both companies have proven adept at navigating varied macro conditions in the past while continuing to expand faster than competitors. Their technology leadership in AI, cloud computing, and other transformational trends should enable sustaining this outperformance.

Conclusion: Megacap Tech Winners With Further Upside After 2023 Surge

After steep share price declines in 2022, it’s quite possible markets overcorrected too far to the downside given the solid long-term fundamentals still supporting leading technology franchises like Amazon and Nvidia. 2023’s sharp rebound reflects investors’ recognition of excessive negativity and rebalancing to more rational valuations.

With their dominant category positions, operational excellence, and secular growth tailwinds, Amazon and Nvidia stand out as tech stalwarts likely to build on 2023’s impressive gains with more material upside ahead. For investors with long time horizons, the huge opportunities still in front of both companies underscore their compelling cases as stocks to buy and own for years to come.

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Mezhar Alee
Mezhar Alee
Mezhar Alee is a prolific author who provides commentary and analysis on business, finance, politics, sports, and current events on his website Opportuneist. With over a decade of experience in journalism and blogging, Mezhar aims to deliver well-researched insights and thought-provoking perspectives on important local and global issues in society.

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