The major U.S. market indexes marched steadily higher through the first half of 2024 -- the S&P 500 , for example, has climbed 16% year to date and set new highs. But in the wake of this run-up, growth stocks are looking expensive and could be due for a pullback. Yet some still seem to have enough business momentum, especially in terms of improving margins and profitability, to push their share prices higher.
Shares of Amazon (NASDAQ: AMZN) and Netflix (NASDAQ: NFLX) are up 20% and 33%, respectively, this year, and have had amazing runs over the last decade, but it's not too late to buy them. Here's why these stocks could outperform in the second half of 2024 -- and beyond.
1. Amazon
Amazon's business grew rapidly over the last 25 years, and the stock delivered life-changing returns for early investors who held on, but it continues to chug along. Since bottoming out in the tech bear market of 2022, the stock has more than doubled in value and recently hit a new all-time high.
Management drove those returns by reducing the costs in its e-commerce business and improving shipping speeds. Amazon will update investors on its second-quarter results on Aug. 1, but in the first quarter, its net profit tripled year over year. The stock could still move higher thanks to accelerating growth in one of its most profitable business segments.
Amazon is the world's leading cloud infrastructure provider, and more companies are turning to it for artificial intelligence (AI) services. Amazon Web Services (AWS) saw its year-over-year revenue growth accelerate from 13% at the end of 2023 to 17% in Q1 2024, and that trend should continue.
Companies have been migrating their data to cloud computing services for years, but the arrival of AI services in the cloud seems to have encouraged them to accelerate that migration. Because AWS is a high-margin revenue source for Amazon, its accelerating growth provides a near-term catalyst for earnings per share gains.
Wall Street analysts expect Amazon's earnings to grow 43% this year, and to grow at an annualized rate of 28% over the next five years. The stock trades at an expensive forward price-to-earnings (P/E) multiple of 40 -- almost double the S&P 500's multiple. But its prospects for high earnings growth justify the premium.
The stock will likely continue to trade around the same forward P/E over the next year or so. This means the share price could rise in lockstep with the company's earnings growth and continue to hit new highs by the end of 2024.
Because the average company in the S&P 500 index is expected to post just 9% year-over-year earnings growth in the second quarter, Amazon's robust earnings growth should lead to superior returns for shareholders.
2. Netflix
Netflix has made an impressive comeback over the last few years. Though it fell sharply during the broad market sell-off in 2022, it has rocketed upward by more than 260% from the cyclical low it hit in July 2022.
Now, it looks unstoppable. It's closing in on 300 million global paid subscribers after posting double-digit percentage growth in memberships over the last year. It ended the second quarter with 277 million members, up 16% year over year.
Its efforts to end password sharing and compel viewers who had been using other households' accounts to start subscribing on their own has driven strong top-line growth, too. Second-quarter revenue came in ahead of Wall Street's estimates, up 22% year over year on a currency-neutral basis. Some of that growth was credited to several new releases, including The Roast of Tom Brady , which Netflix said attracted its largest live audience yet.
Netflix continues to look like a solid investment for the long term, as it continues to expand its offerings. Members are responding enthusiastically to its live sports content. The service is slated to livestream two NFL games on Christmas Day, which could attract new subscribers and help it finish the year strong.
Importantly for investors, management's goal is to increase its operating margin every year, which should continue to fuel above-average earnings growth. Wall Street expects the company's earnings to increase by 40% this year, and to grow at an annualized rate of 24% over the next five years.
Meanwhile, Netflix stock trades at a forward P/E of 33 based on this year's earnings estimates. Because Netflix makes money from subscriptions, which are fairly steady sources of revenue, its growth may warrant a higher P/E.
Assuming the stock continues to trade at the same forward P/E, its price should continue to climb along with earnings, which points to more upside in 2024 and even greater upside potential over the next few years.
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 Netflix. The Motley Fool has a disclosure policy .
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