Why These 3 Stocks Are My Top Picks For 2024 (2024)

First of all - a delayed - Happy New Year to everyone reading. 2023 was a pretty solid year for the stock market with all major stock indices having a nice performance.

In this article I'm going to give a prediction on my Top 3 Stocks for 2024. I won't go into detail on every aspect of the business as this would be way too much information for one article. So for a deep dive please refer to my general articles. I nevertheless will be updating my valuation to the latest numbers so stay tuned even if you already read my previous articles.

1. Amazon - Still A Steal At These Levels

I published an article on Amazon (AMZN) in the middle of December 2023, however the company hasn't really moved from this price level since then:

In short the company can be separated into the following relevant business segments:

1. Online Stores - 1st Party
2. Online Stores - 3rd Party
3. Physical Stores
4. Advertising
5. Subscriptions
6. Cloud - AWS

For this article, I will focus on the Online Stores 3rd Party, Advertising and the Cloud Segment. Of course the rest is also important but these three segments should especially drive the growth in the following years. Like mentioned above for more insight - also on the "less" impact-full segments - please refer to my last article on Amazon.

Online Stores - 3rd Party

The global e-commerce sales are expected to grow at a CAGR of 14.4% until 2027.

While this is already pretty impressive growth, I believe that Amazon could achieve even higher growth rates, when considering that the company is currently laying increasing emphasis on their 3rd party sales and is therefore decreasing the share of the less profitable 1st party sales.

With the above mentioned market growth rate of ~14%, these growth metrics for the 3rd party sales should be fitting:

Bear: 14% p.a.

Bull: 20% p.a.

The feasible margins for Amazon lay between 20% to over 40%, when looking at two American rivals in this market Etsy (ETSY) and eBay (EBAY).

With this in mind, we can anticipate the following EBIT margins for the Bear and Bull Case:

Advertising

The general digital ad spend is predicted by experts to grow like this:

• 2024: 10.9%
• 2025: 10.0%
• 2026: 9.2%
• 2027: 8.6%

Amazon is however heavily expanding its market share in this segment and I believe that their more "targeted" approach - where they directly display ads on a shopping site- is a USP for Amazon, which is why we can also anticipate that Amazon is growing above the market rate in this scenario.

Bear: 12% p.a.

Bull: 15% p.a.

Major competitors of Amazon like Meta and Google are currently sitting at margins of 30% to 39% in this segment. Given that AMZN's advertisem*nts are highly targeted to customers who are already considering making a purchase since they are on the Amazon website, Amazon should be able to achieve or even surpass these figures, in my opinion.

With this in mind, we can anticipate the following margin development:

Cloud - AWS

According to statista Amazon is currently holding around 32% in the cloud infrastructure market.

It is projected that between 2023 and 2030, the worldwide cloud computing is growing at a compound annual growth rate of 20%. Since Amazon has mostly been able to maintain its market share versus its rivals over the past few years, I think it is safe to predict that growth rates will be about in line with market rates.

Bear: 15% p.a.

Bull: 20% p.a.

With our Bull Case, I only projected 20% annual growth because it appears unfeasible to rise beyond the market given our current 30%+ market share.

With this knowledge, we can project the following for margins:

Bear-Case

With these assumptions and of course some assumptions on the here not mentioned different business segments, we get the following revenue and EBIT over the next years:

With these metrics and through utilizing a suitable WACC, Perpetuity Growth Rate, and EBIT to FCF conversion we get the following target share price:

We get a fair value share price of $138 in our Bear Case scenario, meaning that the company could be overpriced by only 10%. But bear in mind that this also includes a slowdown in growth, with some growth below the market rate and lower profits than competitors.

Bull-Case

Here are once again the main assumptions for revenue and EBIT margin summarized:

Based on the Bull-Case assumptions, $265 is the current fair value share price. This suggests that Amazon may now be 73% undervalued. On the other hand, they include profit margins that are larger than those of their main rivals and growth rates that surpass the market.

Google - On The Paper Still The Least Expensive Of The Magnificent Seven

When we take a look at the current P/E Ratios of the Magnificent Seven, Alphabet (GOOG) (GOOGL) seems to be still the least expensive of the seven.

My last article on this company was in August, 2023 and the company returned a solid 13.6% since then:

Alphabet's business can be separated into the following segments:

1. Services
2. Cloud
3. Other Bets

As the services and cloud segment seem like the most important aspects of Google's business, we'll focus on these two in this article. For more insight once again refer to my last article on the company.

Services

The revenue from Google Ads makes up the majority of the services section. Around 88% of the service income is, in fact, what Alphabet itself classifies as advertising, in their latest quarterly earnings report. Keeping that in mind, I think it is reasonable to assume that Google's whole services business behaves like the digital advertising portion of the business.

If we use the above stated market growth rate of the digital ad spend market and adjust it for the Bear and Bull case, we get the following growth metrics for this segment:

The average EBIT margin of last 5 years - 34% - seems like a good starting point for the year 2023 in our DCF.

The average of these 5 years and the margin of 2022 - 34% - seem like a good starting point for the year 2023 in our DCF.

From there on, I anticipated the following development, based on the different scenarios:

Google Cloud

Google's growth in the Cloud segment is nothing but spectacular:

Like mentioned in the AWS segment, the global cloud computing market is expected to grow at a compound annual growth rate of 20%. This however doesn't factor in the fact that Alphabet is increasingly gaining market share in this very dynamic market. The growing adoption of AI should also help Alphabet's position in this market, considering their AI tools for developers and customers.

With this information, we can predict the following growth rates for this segment:

Bear: 20% p.a.

Bull: 25% p.a.

The EBIT margin of Google's cloud is also trending in the right direction, as Alphabet is doing its best to improve their costs in this segment. :

They are already doing rather well in 2023/2024, as in the most recent quarter, they were able to attain an EBIT margin in this sector of around +3.2%, meaning that they are turning a profit for the third consecutive quarter.

Taking into account the margins of AWS and Azure however there is still a lot of room to grow, as AWS is currently achieving EBIT margins between 35% and 24%. MSFT is even achieving an EBIT margin of 43% in its "intelligent cloud" business.

For the different scenarios, I expect the margins to develop as follows. For a similar starting point I assumed an EBIT margin of 5% for 2023, as in Q1/Q2 of 2023 they achieved a margin just around that mark:

Bear-Case

According to our Bear-Case scenario, which predicts low growth rates in the Advertising and Cloud Segment as well as declining ad business margins and slowly increasing cloud business margins, we arrive at a price target of approximately $125, suggesting that the company may currently be 15% overvalued.

Bull-Case

Based on our Bull-Case scenario's ambitious yet realistic assumptions, we obtain a price objective of around $265, suggesting that Alphabet may be currently undervalued by around. But to justify this valuation, the company has to expand beyond the market rates and raise its margins in both of its main markets at the same time.

T. Rowe Price Group - Even Without Growth The Company Seems Inexpensive

I last covered T. Rowe Price Group (TROW) in September 2023, from this point on the company hasn't really changed significantly. While the S&P however returned a very solid 7.8% in the same time frame.

TROW is steadily increasing its AUM (Assets Under Management) after the pretty sharp decline from 2021 to 2022. But the company has still a very long way to go, to get back to 2021-levels.

When we however take a look at the current valuation of the company, it seems rather cheap compared to its historical figures.

As this point of view however doesn't consider a potential stagnation AUM and therefore revenue growth, a DCF where we assume Bear and Bull Case scenarios, seems fitting to evaluate the company detached from any historical figures.

Bear-Case

For the Bear-Case, we assume that the company doesn't grow at all in the next few years and therefore the AUM and the revenue stay flat. This seems very unlikely as alone the market change should lead to growth over this time frame. Let alone potential net inflows of new or existing customers that want to invest their money with TROW products.

With no growth included in for the next eight years, we get a target price of around $135 based on these assumptions, indicating that the firm is now undervalued by almost 20%.

Bull-Case

For our Bull-Case we assume that the company is managing to get back to their historical growth path and therefore achieve a revenue growth rate of ~6%. The other metrics stay the same.

With our Bull-Case we arrive at a price target of ~$195, this indicates that the company is possibly undervalued by 45% right now, considering that the company manages to achieve its 10 years average revenue growth rate.

Conclusion

For our Valuations we get the following over- and under-valuations:

Amazon: -10% to +73%

Google: -15% to +79%

TROW: +20% to +45%

With these metrics it is safe to say, that for these stocks the opportunities currently heavily outweigh potential risks and downsides. Which is why these three stocks could very well be a very solid foundation for a successful investing year in 2024.

German Buy-Hold-Check investor. With a degree in both industrial engineering and economics, I am able to understand, quantify, and interpret both the economics and (to some point) the technology of companies.