It's safe to say that artificial intelligence (AI) was one of the biggest investment themes of 2023. Technology stocks ripped to all-time highs with the Nasdaq Composite increasing 43% on the year.
Some of the most prominent winners were the "Magnificent Seven" -- a moniker that includes megacap tech companies Microsoft, Alphabet, Amazon (NASDAQ: AMZN), Apple, Nvidia, Tesla, and Meta Platforms. Microsoft was the first in big tech to show its hand following a multibillion-dollar investment in OpenAI, the developer behind ChatGPT.
This undoubtedly sparked market-moving responses from competition, including Amazon. After the stock surged 80% in 2023, investors might be wondering if now is a good time to book some profits. Not so fast! Despite the Nasdaq's superb performance last year, there is evidence that 2024 could bring even further gains.
Let's dig into what might be in store this year, and why Amazon looks primed to thrive.
History doesn't repeat, but it often rhymes
A brief understanding of the Nasdaq should help shine some light on why I believe 2024 could be another strong year for the tech-heavy index.
Since its inception in 1971, the Nasdaq has only had a negative annual return 14 times. Moreover, the only times in its history the index experienced downturns in consecutive years were in 1973 and 1974, and from 2000 to 2002.
Given this data, it's clear that the Nasdaq tends to rebound following a down year. While this is encouraging on the surface, investors might be keen to learn about the magnitude of these bounce-backs.
Following back-to-back declines in 1973 and 1974, the Nasdaq went on to return at least 25% in four of the next six years. Additionally, the Nasdaq has only dropped by 30% or more three times since 2002. In each of these cases, the index generated returns in excess of 40%. Taking it a step further, two out of these three periods were followed by further gains for at least another year.
The last time the Nasdaq fell by at least 30% was 2022. This means 2024 is the second year following a downturn in excess of 30%, with 2023 returning over 40%. If the historical trends covered above continue, then investors should, in theory, expect another good year following last year's strong momentum.
While investors should understand that past results are not indicative of future performance, I think there are many reasons to be bullish on the Nasdaq's prospects this year.
Image source: Getty Images.
AI and cloud computing are a match made in heaven
Although Amazon is mostly known for its global e-commerce business, the company is an undisputed leader in cloud computing. The table below illustrates the revenue and operating margin trends for the company's cloud segment, Amazon Web Services (AWS).
Category
Q2 2022
Q3 2022
Q4 2022
Q1 2023
Q2 2023
Q3 2023
Revenue
$19.7 billion
$20.5 billion
$21.4 billion
$21.4 billion
$22.1 billion
$23.1 billion
Growth (YOY)
33%
28%
20%
16%
12%
12%
Operating margin
29%
26%
24%
24%
24%
30%
Data source: Amazon. YOY = year over year.
Over the past year, AWS has been experiencing a declining rate of growth while margins have remained basically flat. While this might not exude the strongest picture, I wouldn't sour on Amazon just yet.
Last year, the company invested $4 billion into an OpenAI competitor called Anthropic. The partnership revolves around AWS. More specifically, as part of the deal, Anthropic will be using AWS as its primary cloud provider. Moreover, the company also agreed to train future generative AI models using Amazon's homegrown inferencing semiconductor chips.
Why Amazon looks primed to thrive in 2024
The high-level implication of Amazon's investment in Anthropic is that it should help ignite some acceleration within AWS. One of the newer applications within the AWS ecosystem is Amazon's managed service offering, Bedrock.
Anthropic could end up being a great source of lead generation for Bedrock, which offers customers a host of large language models (LLMs) that can be implemented for a variety of use cases. Bedrock is unique in that it allows users to test different types of LLMs and assess their AI capabilities. In turn, customers can make data-driven decisions as to which offerings within Bedrock best suit their needs.
With a price-to-sales (P/S) ratio of just 2.7, the stock looks dirt cheap compared to its long-run average of 3.4. Moreover, this is significantly lower than that of Microsoft and Alphabet, which trade at P/S multiples of 12.6 and 5.9, respectively.
If 2023 was the year that AI made its way into the mainstream, I think 2024 could be the beginning of how these applications fit into IT budgets more broadly. For this reason, investors should get a preview of just how much capital will be allocated toward AI this year. And given the secular tailwinds in both cloud computing and AI, Amazon appears well-positioned to take advantage of market dynamics.
I wouldn't sleep on the company's prospects of generating more accelerated growth this year, and see now as a terrific opportunity to scoop up shares at a bargain.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Adam Spatacco has positions in Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool has a disclosure policy.
