With the S&P 500 index breaking out to new highs in 2024, it's safe to say a new bull market has arrived. It's also safe to say that the usual suspects in technology are leading the market higher.
If you have an extra $500 available to invest that isn't needed to pay monthly bills or bolster an emergency fund, I believe you can't go wrong putting it toward Amazon (AMZN -1.43%) and Snowflake (SNOW -4.44%) stock. You can buy one share of each, as both stocks still trade below $500. Here's why these two leading tech stocks could deliver wealth-building gains to investors.
1. Amazon
A new bull market often spells good news for the economy coming around the corner. Because Amazon is the e-commerce leader, its business is more tied to the health of the consumer than 10 years ago. But this is why accelerating growth in its online stores is good news for investors. Share prices of Amazon are up 66% over the last 12 months and broke out to reach new highs following its fourth-quarter earnings report on Jan. 30.
Amazon is seeing improving growth in online stores that management credits to greater selection, lower prices, and faster shipping. It's a proven formula that Amazon has used for years to win a legion of loyal customers. After slumping over macroeconomic headwinds, sales from online stores accelerated for the fourth consecutive quarter to an increase of 8% year over year.
Most importantly, management's efforts to squeeze more profits out of the retail business are bearing fruit. Amazon's North America operating profit margin has now improved for seven straight quarters, while the international segment showed a whopping $1.8 billion improvement in operating loss. This contributed to an overall increase of 383% year over year in operating profit for the fourth quarter of 2023.
Profits should keep improving in 2024. Management is still finding areas in the business to cut costs, which could fuel further gains for the stock. Additionally, Amazon continues to see strong growth from non-retail services, such as cloud services and advertising, which are becoming larger components of the company's total revenue and are inherently more profitable than the retail segment. There are multiple ways for the company to deliver the goods for investors over the long term.
These drivers of profitability are still undervalued by the market. Amazon stock trades at a price-to-sales (P/S) ratio of 3.1, which is significantly lower than the pre-pandemic P/S valuation of around 4. In other words, the stock could climb about 30% just by returning to its previous average P/S ratio. If Amazon continues to improve margins, the stock would deserve a higher valuation and offer significant upside over the next five years.
2. Snowflake
Shares of Snowflake are up 46% over the last year after a disappointing showing in 2022. Slowing revenue growth was an anchor on this previously expensive cloud stock, but the outlook across the tech sector is improving. Several top tech companies have reported soaring demand for artificial intelligence (AI) services. Snowflake's focus on this opportunity could lead to better-than-expected revenue this year and send its stock even higher.
The company offers a range of products that help companies analyze and distill insights from vast quantities of data. It generates revenue like other cloud services based on the consumption of resources used. This is why it was encouraging that management credited improving consumption trends for the recent increase in product revenue of 34% year over year in the October-ending quarter.
A trend working in Snowflake's favor is that companies can't use AI without quality data, and that's exactly what Snowflake is in business to provide. It helps companies analyze data free from errors, and customers also can exchange quality data through Snowflake's marketplace, which is attracting customers.
It is particularly encouraging that Snowflake's two fastest-growing customers in the last quarter were migrating data from a competitor. Snowflake disclosed a net promotor score of 72 in its annual report last year, which is well above the industry average and points to a competitive advantage.
The company raised revenue guidance last quarter and now expects full-year product revenue growth of 37% in fiscal 2024 ending in January. As the business scales, investors are also seeing better margins. An improving demand environment bodes well for the stock's prospects in 2024 and beyond.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Snowflake. The Motley Fool has a disclosure policy.
