Some investors love picking up shares of the latest top performers, with the idea of getting in on a stock that already has a lot of momentum. Other investors do just the opposite, fleeing these shares, thinking that they've climbed so much that they may be ready for a decline. After all, a stock generally doesn't advance nonstop forever without marking a pause.
Both moves could work out nicely or badly, and that's why it's important to consider your potential buys on a stock-by-stock basis. Let's zoom in on two of 2023's top performers, technology and consumer goods giants Amazon (NASDAQ: AMZN) and Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL). In the case of both of these stocks, you'll probably regret it if you don't hop on the bandwagon and buy these shares before year-end. Let's find out why.
Amazon is a leader in two fast-growing markets: E-commerce and cloud computing. The company has a long track record of growth, but it did fall into some tough times over the past couple of years as the economic environment weighed on its costs and on its customers' buying power.
There is something positive about this difficult turn of events, though. It gave Amazon the push to improve its cost structure -- and it showed us as investors that the company is capable of taking the right actions to address problems and reignite growth. The company's efforts -- from cutting jobs to investing in only the highest growth areas and revamping its U.S. fulfillment network -- have been bearing fruit.
After reporting its first annual loss in nearly a decade last year, Amazon's earnings this year have strengthened from quarter to quarter. In the most recent period, the company reported gains across financial metrics, with net sales and net income climbing. And Amazon generated an inflow of cash -- in the billions -- versus a billion-dollar outflow in the year-earlier period.
The stock has advanced this year, and for good reason, considering all that I've just mentioned. But why should you buy the stock today? Because Amazon has plenty of gas in the tank to power more gains over time.
Yes, at a certain point, the stock likely will dip, but these points in time are impossible to predict. So, it's best to get in when a stock looks reasonably priced -- like Amazon today, trading at 55x times forward earnings estimates, reasonable for a growth stock with a fantastic track record -- and sit back to enjoy the long-term story.
You probably know Alphabet best through something you may use every day: Google search. Alphabet's Google is the world's top search engine, steadily holding on to 91% of the market. This could last for a couple of reasons.
First, Alphabet's moat, or competitive advantage, is its brand strength -- people routinely use Google to find information they need on the internet, so they're unlikely to switch out of that routine. Second, Alphabet's investments in artificial intelligence (AI) to continually improve its search platform should keep these already loyal users satisfied.
Why is it so important for Alphabet to stay on top in the search market? Because this keeps advertisers -- which contribute a significant amount to the company's revenue -- coming back.
During recent tough economic times, some investors worried that advertisers would drastically cut spending, and this would hurt Alphabet. But declines have been temporary and minimal, and in the most recent quarter, advertising and overall revenue advanced.
I mentioned AI earlier as something that will please those who use Google's search engine, but Alphabet also sees it as a tool that will help grow advertising. The company is using AI to help ads better target the right audience and to make the advertising process more efficient, so Alphabet's AI strengths will save advertisers time and likely deliver stronger results.
On top of this, Alphabet just launched its most powerful AI model, Gemini, which it aims to use across its products. So, stay tuned for more growth ahead.
You might expect a stock like Alphabet to cost a fortune, especially after this year's double-digit increase. But it actually trades for only 23x forward earnings estimates, a deal considering analysts' forecasts for double-digit annual growth over the coming five years.
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Suzanne Frey, an executive at Alphabet, 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. Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Alphabet and Amazon. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.