The two best-positioned megacap tech stocks in 2024: Analyst

Amazon (AMZN) and Meta Platforms (META) were among the tech stock leaders who drove growth in the S&P 500 (^GSPC) throughout 2024's first quarter. The two Magnificent Seven members are Wells Fargo Senior Analyst Ken Gawrelski's top stock picks for the tech sector.

Amazon is "making many fundamental improvements in logistics capabilities and efficiencies. So, we expect margins to continue to inflect higher in the retail business," Gawrelski tells Yahoo Finance. "The second business, which is AWS [Amazon Web Services], their cloud business, that was also an inflection in 2023, but that inflection was there after a steep decline of growth from 2022 to 2023."

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Editor's note: This article was written by Luke Carberry Mogan.

Video transcript

- Megacap tech names like Google, Meta, NVIDIA, Microsoft, Amazon drop 43% of the S&P 500 gains in the first quarter of this year. This is according to Yahoo Finance calculations. So we're seeing a bit of a reversal here at the start of April. Can they keep up that momentum through the second quarter? Doesn't look like it so far.

We want to bring in Ken Gawrelski. He's a Wells Fargo senior analyst. Ken, let's just take a step back. What is your outlook here when it comes to big tech following that massive run up that we saw not only in the first quarter, but going back to what we saw in 2023?

KEN GAWRELSKI: Right. Thank you so much for having me. So we're certainly most positive on Amazon of the big three. But we also recommend Meta. And we see really strong fundamental trends here.

And I would say there are certainly pockets of the market where valuations look a bit stretched. But I would say that's not so much the case in these three. But we prefer the fundamentals certainly in Amazon, our top pick, and Meta relative to Google.

- Ken, I wonder in how you're looking across some of the themes that were really drivers for the largest names in tech, where those themes either remain strong or w you're starting to see some weakness.

KEN GAWRELSKI: Sure, absolutely. Maybe let's start first with Amazon. 2023 was about an inflection in the two business lines. They have the retail business where it was really a margin inflection. Recall in 2022, margins went negative. It was an unprofitable retail business and inflected to the positive in 2023.

That continues into '24 and beyond. And advertising has been a strong driver of that. But they're also making many fundamental improvements in the logistics capabilities and efficiencies. So we expect margins to continue to inflect higher in the retail business.

The second business, which is AWS, their cloud business, that was also an inflection in 2023. But that inflection was after a steep decline of growth from 2022 to 2023, the business bottomed at 12% in the middle of the year. And we saw a slight uptick in the fourth quarter to 13%. And we expect that acceleration to continue starting in the first quarter with a plus 15 and exit the year at a higher rate in the high teens.

- So Ken, compare that to what you're seeing play out over at Meta, one of your other stocks that you have an overweight rating on. You did recently just reduce your price target there. What is that upside look like then for Meta, the catalyst that's going to drive that movement?

KEN GAWRELSKI: Yeah, so Meta has been a fantastic performer. And I'd say it had really kind of above trend growth here. And we expect above trend again in the first quarter. We raised our numbers slightly in the first quarter. And we expect another quarter, a strong guide in the second quarter.

Now the business will normalize from a growth rate perspective in the back half of the year. We're thinking more like mid-teens. Keep in mind that's in a digital ad industry that's growing 12% to 13% for this year by our forecasts. So the business will certainly start to normalize growth.

The key for us with Meta is thinking about that next product catalyst, that next product cycle because we had reels which is their short video service which was a headwind to revenues, but a positive for engagement. And think of this as the comparable business to TikTok's short video service. They've had a ton of traction.

This is a business that's running more than a $20 billion revenue run rate now. And it was a massive driver for '23. Will continue into '24, but it's a lessening contributor to growth. We're looking for those next product catalyst to drive above trend growth in the back half and into '25.