These Will Be 2 of the Strongest Stocks in 2023

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The end of 2022 is fast approaching, and most investors will probably be relieved when it’s over. If the year ended right now, the 29% decline in the Nasdaq-100 technology index would be the worst result since the global financial crisis rocked the world in 2008.

Soaring inflation has been the story of 2022 because it has crushed consumers’ spending power, especially when it topped a 40-year high in June. But the more recent inflation results have pointed to a cooldown, and thanks to ultra-aggressive interest rate hikes by the U.S. Federal Reserve, there’s a good chance that trend will continue into the new year.

For that reason, the companies that have been hardest hit by inflation could be the biggest winners in 2023. Here’s why I predict global e-commerce giant Amazon (AMZN -2.20%) and Google parent Alphabet (GOOGL 0.59%) (GOOG 0.59%) will be among them.

1. Amazon’s e-commerce business is already bouncing back

Amazon is the largest e-commerce company in the world, but while e-commerce still drives the overwhelming majority of its revenue, that part of its business has slowed significantly this year. When it comes to the impact of suppressed consumer spending power, retail tends to be on the front lines.

But green shoots emerged in the recent third quarter (ended Sept. 30). Amazon generated $127.1 billion in total revenue, a jump of 15% compared to the year-ago period, which was the fastest rate of growth in 2022 so far. Pair that result with the gradual improvement in the inflation picture, and investors can make the case that momentum might be building into 2023.

Amazon’s advertising business deserves a special mention. Its $9.5 billion in revenue during Q3 marked a 25% expansion year over year, a sharp acceleration compared to both Q1 and Q2. When the economy is weak, businesses usually cut back on their marketing spend, and that has been obvious throughout this year based on the results of some of the largest technology companies. Therefore, observing Amazon’s strong performance in Q3 hints that some confidence might be creeping back into the corporate world.

One area of disappointment in the recent quarter was Amazon Web Services (AWS), the company’s industry-leading cloud services business. It has routinely been the bright spot for Amazon, and often accounts for the entire company’s operating income thanks to its soaring growth and high profit margin relative to its retail segment. In Q3, though, revenue generated by AWS decelerated to 27%, which was the slowest pace of the year.

Investors shouldn’t expect that to last, because the cloud industry is critical to the corporate world and is slated to be worth over $1.5 trillion annually by 2030, so it still has plenty of legs next year and beyond.

With Amazon stock down 46% from its all-time high, now could be a great time to get involved ahead of 2023.

2. Alphabet’s best times might still be ahead

Alphabet is the parent company of Google, but the organization has branched out much further than its core brand. Google, however, is heavily reliant on advertising to generate revenue because of its world-leading search engine, and that business remains the driving force behind Alphabet as a whole.

But Alphabet has another prominent segment reliant on marketing dollars — its video platform YouTube. In September, YouTube led TV streaming viewership in the U.S. for the first time in its history. To give you an idea of how far this platform has come, Alphabet (then Google) acquired YouTube for $1.65 billion in 2006, and 16 years later it now generates almost $30 billion in annual revenue.

Despite its enormous size, it continues to adapt. After facing a competitive threat from ByteDance’s TikTok, which is dominating the short-form video space particularly among younger users, YouTube launched Shorts. In just two years, Shorts has amassed 1.5 billion monthly active users and now stands eye-to-eye with its new rival. The format is occupying more of users’ time spent on YouTube overall, and since it monetizes at a lower rate, this has impacted the platform’s revenue growth.

But rest assured when the economy improves, businesses will want to direct their marketing dollars to wherever the coveted Generation Z and millennial audiences are most likely to be. If inflation continues to moderate into the new year, YouTube (and Shorts specifically) could supercharge Alphabet’s growth.

Pivoting back to Google Search, Q3 was disappointing. The segment grew by just 4.2%, and considering it makes up 57% of Alphabet’s total revenue, this was a big drag on the company overall. In the year-ago quarter, it grew by a whopping 44%, so there is a likelihood that when the economy recovers, so will Search’s advertising revenue.

Alphabet stock trades at a 36% discount to its all-time high right now, so this might be a dip worth buying ahead of 2023.

This article was originally published on this site