The Nasdaq-100 index is home to 100 of the most prominent technology companies listed on the Nasdaq exchange. The index had a miserable year in 2022 with a decline of 33%, but history suggests investors should ditch the pessimism in 2023.
That's because the Nasdaq-100 has fallen in consecutive years on only one occasion in its 37-year history, and that was during the dot-com bust between 2000 and 2002.
Every other time that the index generated a negative annual return, it bounced back the very next year with an average gain of 52%! Since it has already climbed 13% in 2023 so far, history might be set to repeat itself.
The following three stocks are part of the trillion-dollar club -- each has a market capitalization exceeding $1 trillion -- and here's why they could be among the biggest winners if the Nasdaq-100 soars in 2023.
1. Alphabet could see its ad business recover
Soaring inflation is the core reason the Nasdaq-100 plunged last year. The price shocks crushed consumers' spending power, not to mention prompting the fastest increase in interest rates in history. Businesses adopted defensive positions, which led to growth concerns.
A pullback in business spending dealt a direct blow to Alphabet (GOOGL 1.16%) (GOOG 1.19%)because platforms like its Google Search and YouTube rely on advertising to generate revenue. Thankfully, there are signs inflation has peaked, which could result in a more favorable environment overall for the company's core business.
Alphabet has an exciting 2023 ahead, particularly for YouTube thanks to surging uptake for its Shorts format, which was developed to compete with ByteDance's TikTok, the short-form video king.
YouTube Shorts were generating 50 billion views per day at the end of 2022, up from 30 billion at the start of the year. Monetization is the next frontier, and the company says it's working on a series of initiatives to share revenue with creators and attract businesses.
Then there's artificial intelligence (AI). This could be a breakout year for the technology, and Alphabet has outlined three areas it will be tackling: language models for purposes like improving Google Search, development tools for third parties to create their own AI applications, and cloud services to help businesses harness the power of AI. Combined, these could present trillions of dollars in opportunities for the company in the coming decade.
Alphabet stock trades at a price-to-earnings (P/E) ratio of just 20.8 at the moment, which is 14% cheaper than the 24.3 P/E of the Nasdaq-100. It implies Alphabet will have to jump almost 17% just to trade in line with its peers in the tech sector, and that's an opportunity for investors.
2. Microsoft gears up for an AI battle
Don't be surprised to hear Wall Street regularly speaking about Microsoft (MSFT 0.91%) and Alphabet in the very same breath this year, because the two giants are on a collision course when it comes to AI.
Microsoft just committed to a $10 billion follow-on investment in OpenAI, the creator of conversational platform ChatGPT. It intends to use the technology to transform its Bing search engine, which currently holds a global market share of just 3% compared to Google's 93%.
The move prompted Alphabet to pull the curtain back on its own AI initiatives recently, including the release of its chatbot called Bard. Alphabet has arguably never seen a threat like this to its monopolistic search business.
Nonetheless, Microsoft had its own challenges last year with inflation. Not only did it hurt sales of the company's Surface brand of notebook computers and its Xbox gaming ecosystem, but a fall in PC sales in general also led to a 39% year-over-year drop in Windows revenue in the fiscal 2023 second quarter (ended Dec. 31). If inflation continues to soften in 2023, expect those businesses to come roaring back.
Microsoft Azure continues to be a bright spot because businesses are still investing in cloud services to reduce costs and create new revenue opportunities. Azure is one of the two largest cloud platforms in the industry, and it's fighting for what could be a $1.5 trillion annual opportunity by 2030, according to Grand View Research.
Between AI and the cloud, Microsoft could be set to add enormous long-term value for investors. Combined with a potential rebound in its consumer segments this year, now looks like a great time to become a Microsoft shareholder.
3. Apple is as good a bet as ever
Apple (AAPL 1.47%) and Microsoft were once the fiercest of rivals, but while Microsoft shifted its focus toward cloud services for businesses, Apple remained a quintessential consumer company. It's now the largest company in America, with a $2.4 trillion market capitalization. And it's the largest holding at Warren Buffett's investment firm Berkshire Hathaway -- a strong endorsem*nt from one of the world's greatest investors.
If the Nasdaq-100 index recovers in 2023 on the back of an improving economy, Apple stock could be among the best performers. That's because it draws all of its revenue from consumers, and an uptick in economic growth means they'll be spending more money.
The company just reported results for its fiscal 2023 first quarter (ended Dec. 31), and it was a mixed bag. Hardware cooled in general with a 7.7% drop in revenue year over year, led by a decline in iPhone 14 sales due to production issues in China and broader economic weakness. Apple's installed base hit an all-time high of 2 billion, though, which accounts for all active devices, including iPhones, iPads, Apple Watches, and Macs.
That bodes well for services like Apple Music, Apple News, iCloud, and Apple Pay, because more active devices mean more potential subscribers. So it's no surprise that revenue in the services segment continued to climb in the first quarter.
But this could also be a breakout year for new hardware launches as more companies share their vision for the next generation of digital devices. Apple is rumored to be announcing a headset combining virtual and augmented reality in 2023, which could unlock a new ecosystem and a series of new revenue streams.
Apple stock remains down 16% from its all-time high, so this could be a great opportunity to buy ahead of what could be a much stronger year, especially if history repeats for the Nasdaq-100.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Apple, Berkshire Hathaway, and Microsoft. The Motley Fool recommends Nasdaq and recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
