Sarah Travers
The major U.S. market indexes have shown impressive gains through the first half of 2024. The S&P 500, for instance, has climbed 16% year to date, setting new highs. While growth stocks currently appear expensive and may be due for a pullback, certain companies still exhibit robust business momentum, particularly in terms of improving margins and profitability. Among these, Amazon (AMZN) and Netflix (NFLX) stand out, with their shares up 20% and 33%, respectively, this year. Here’s a closer look at why these stocks could outperform in the second half of 2024 and beyond.
Amazon: A Continuing Success Story
Amazon’s business has expanded rapidly over the past 25 years, delivering substantial returns for early investors. Despite a tech bear market in 2022, Amazon’s stock has more than doubled in value since then, recently reaching a new all-time high. This growth can be attributed to strategic cost reductions in its e-commerce business and improvements in shipping speeds, which have significantly boosted profitability.
In the first quarter of 2024, Amazon’s net profit tripled year over year, demonstrating its strong financial performance. One of the primary drivers behind this success is Amazon Web Services (AWS), the world’s leading cloud infrastructure provider. AWS has seen its year-over-year revenue growth accelerate from 13% at the end of 2023 to 17% in the first quarter of 2024. This trend is expected to continue as more companies migrate their data to cloud computing services, spurred on by the growing demand for artificial intelligence (AI) services.
AWS’s accelerating growth is a high-margin revenue source for Amazon, providing a significant near-term catalyst for earnings per share gains. Wall Street analysts project Amazon’s earnings to grow by 43% this year, with an annualized growth rate of 28% over the next five years. Despite trading at a forward price-to-earnings (P/E) multiple of 40, nearly double the S&P 500’s multiple, Amazon’s high earnings growth potential justifies this premium. The stock is expected to continue trading around this forward P/E, meaning its share price could rise in lockstep with the company’s earnings growth, hitting new highs by the end of 2024. With the average company in the S&P 500 index anticipated to post just 9% year-over-year earnings growth in the second quarter, Amazon’s robust earnings growth is likely to lead to superior returns for shareholders.
Netflix: A Remarkable Rebound
Netflix has experienced a remarkable rebound over the past few years. After a sharp decline during the broad market sell-off in 2022, Netflix’s stock has surged by more than 260% from its cyclical low in July 2022. The company is now closing in on 300 million global paid subscribers, having achieved double-digit percentage growth in memberships over the last year. At the end of the second quarter, Netflix reported 277 million members, up 16% year over year.
This growth has been driven by Netflix’s efforts to end password sharing and encourage viewers who had been using other households’ accounts to subscribe independently. As a result, the company’s second-quarter revenue exceeded Wall Street’s estimates, rising 22% year over year on a currency-neutral basis. Several new releases, including The Roast of Tom Brady, which attracted Netflix’s largest live audience yet, also contributed to this growth.
Looking ahead, Netflix continues to expand its offerings, with members responding enthusiastically to its live sports content. The service is set to livestream two NFL games on Christmas Day, which could attract new subscribers and help it finish the year strong. Importantly for investors, Netflix’s management aims to increase its operating margin annually, fueling above-average earnings growth. Wall Street forecasts the company’s earnings to grow by 40% this year, with an annualized growth rate of 24% over the next five years.
Netflix’s stock currently trades at a forward P/E of 33 based on this year’s earnings estimates. Given the steady revenue from subscriptions, this growth may warrant a higher P/E. Assuming the stock continues to trade at the same forward P/E, its price should climb along with earnings, indicating more upside in 2024 and even greater potential over the next few years.
While the broader market may see some volatility, Amazon and Netflix have demonstrated strong business momentum and profitability that could drive their stock prices higher. Investors looking for opportunities in the second half of 2024 should consider these two top-performing stocks.
