Welcome to the race where the finish line is always moving forward, and the front-runner racers get to draw the map.
Amazon (NASDAQ: AMZN), Netflix (NASDAQ: NFLX), and Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) 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 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.
Alphabet’s AI Ambitions
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.
The E-Commerce Tale of 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 company takes advantage of the generative AI frenzy in three distinct layers.
Netflix’s Strategic Evolution
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.
Netflix’s Revamped Business Strategy Sparks Investor Confidence
A New Direction
Netflix is taking bold steps to revamp its business strategy, aiming for fatter profits and richer free cash flows. The recent changes, which include introducing a lower-priced plan supported by ads and cracking down on password-sharing, mark a departure from its traditional offerings. The company is even testing the waters in the video game industry, potentially paving the way for new revenue streams in the near future.
Market Rollercoaster
Initial reactions from investors to the updated plan were lukewarm, with Netflix’s stock taking a nosedive in 2022. However, as positive updates on the impact of ad-based plans and password-sharing conversions started rolling in, the bears began to retreat. The stock’s trajectory has been upward, boasting a 65% gain over the past year. Despite the surge, Netflix still appears undervalued, with a growing emphasis on profitability and ambitious long-term goals.
Building Confidence
In the coming years, Netflix faces the challenge of persuading skeptical investors that its profit-centric approach is the way forward—a task reminiscent of convincing them about the potential of media streaming back in 2011 and 2012. As the company sets out to rebuild investor confidence and enhance shareholder returns, it’s poised to make a significant contribution to the bullish trend seen in the S&P 500.
