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The November inflation report released last week revealed a second consecutive month of moderating inflationary pressure, which suggests that the stock market could have a better year in 2023 as the Federal Reserve may eventually have to pause the interest rate hikes that have weighed on equities in 2022.
The consumer price index (CPI) for the month of November revealed a 7.1% increase in prices over the prior year, lower than the 7.3% increase anticipated by economists. Core inflation, which includes food and energy prices, increased 6% year over year, compared to a 6.1% increase projected by consensus estimates.
Cooling inflation would set the stage for a slower pace of interest rate hikes by the Federal Reserve, with the central bank expected to stop raising rates after March next year. That’s why it would make sense to look at some stocks that could prosper in 2023 thanks to their strong businesses and a potential improvement in stock market sentiment.
Assuming you have $300 to spare right now, which means your high-interest debt is paid off and you have enough saved for emergencies, now would be a good time to put that money toward buying shares in either Amazon (AMZN 1.91%) or Analog Devices (ADI 1.58%). Let’s look at the reasons why.
Shares of Amazon were battered this year, dropping close to 50%. As surging inflation hamstrung Amazon’s top-line growth in recent months, investors pressed the panic button. That’s not surprising, as the company needs to sustain a high pace of growth to justify its rich valuation.
Amazon is expected to finish 2022 with an 8.6% increase in revenue to $510 billion. That’s going to be a big decline over the company’s 2021 revenue growth of 22%. Additionally, the e-commerce giant is anticipated to deliver a loss of $0.09 per share in 2022, compared to last year’s profit of $3.24 per share.
However, Amazon is expected to get better in 2023. Revenue is estimated to grow by double-digit percentages to $564 billion, while adjusted earnings could jump to $1.67 per share. Consensus estimates suggest that Amazon could sustain this momentum in 2024 as well.
AMZN Revenue Estimates for 2 Fiscal Years Ahead data by YCharts
There are a few simple reasons why Amazon’s prospects should start looking up from the new year. First, the cooling inflation should give its e-commerce revenue a shot in the arm. It is estimated that the global e-commerce market could shrink 9.7% in 2022, with sales hitting an estimated $5.7 trillion. In 2023, however, that number is expected to jump to $6.5 trillion, an increase of 14% over 2022.
Amazon is the second-largest e-commerce company in the world, with an estimated market share of 13%. So the e-commerce market’s improved performance in 2023 should rub off positively on Amazon and help it turn its business around.
Meanwhile, Amazon’s leading position in the global cloud infrastructure service market will be another tailwind in the new year. The tech giant controlled 34% of this market in the third quarter of 2022, having established a nice lead over second-placed Microsoft Azure. The good news for Amazon is that the cloud service market is expected to clock faster growth of nearly 21% in 2023, compared to 19% this year, according to Gartner.
So the stage seems set for Amazon to step on the gas in 2023, especially considering the improving stock market sentiment amid recent inflation reports. As one share of Amazon is now available for less than $90 following a stock split executed earlier this year, investors with $300 to spare can buy this stock in anticipation of a healthy upside in 2023 and beyond.
Semiconductor specialist Analog Devices defied the broader stock market sell-off this year. Shares of the company are down just 6% in 2022, which is impressive considering that the PHLX Semiconductor Sector index is down over 34%. What’s more, Analog Devices stock gained impressive momentum over the past couple of months, as it is up 16%.
A closer look at Analog Devices’ fiscal 2022 fourth-quarter results (for the three months ended Oct. 29, 2022) will tell us why the stock is soaring. The chipmaker delivered $3.25 billion in revenue last quarter, an increase of 39% over the prior-year period. Its adjusted earnings shot up an impressive 58% year over year to $2.73 per share, driven by robust top-line growth and fatter margins.
Analog’s impressive growth was driven by healthy demand for its chips from the industrial, automotive, and communications end markets, as well as the acquisition of Maxim Integrated, which was completed in August last year. The acquisition helped Analog Devices close fiscal 2022 with a 64% spike in revenue to $12 billion.
The company’s outlook for the current quarter indicates that it is on track to sustain impressive growth in the new fiscal year as well. Analog Devices anticipates $3.15 billion in revenue this quarter, which would translate into 17% gains over the prior-year period’s revenue of $2.68 billion. More importantly, Analog management points out that the company has “over a year of backlog and continued momentum in our pipeline.”
That’s not surprising, as demand for chips from the automotive, industrial, and communications markets should head higher in 2023. Automotive chip demand, for instance, will remain robust in 2023 as automakers are still catching up with order backlogs caused by the global chip shortage. Automakers are likely to lap up the available chips that the likes of Analog Devices sell, suggesting that the auto segment should continue doing well for the company.
The communications segment should also be a tailwind for Analog in the new year, as the company is supplying chips for 5G rollouts in emerging markets such as India. As such, don’t be surprised to see Analog Devices stock head higher in 2023.
Analog Devices is trading at 17 times forward earnings, which represents a discount to the Nasdaq-100‘s forward earnings multiple of 23. So investors looking to buy a semiconductor stock should take a closer look at it, as they are getting a good deal on Analog Devices right now.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon.com and Microsoft. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.
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