It has been quite the start to the year for the Nasdaq 100, as it is up 14%. That run-up might scare some investors away from the index, but they should look deeper than the headline numbers.
It can be useful to see how much room the highest-weighted companies in the index have to run before judging if it is worth owning. So let's look inside the Nasdaq 100 to see if it's still a buy after its incredible start to 2023.
Most of the leading components are still down more than the entire index
Although the Nasdaq 100 started off hot, it has only returned to a level last seen in September 2022. In fact, it's still down 24% from its all-time high. This makes it a consideration for investors, but the companies inside also look attractive.
The top 10 highest-weighted companies in the index make up an impressive 53.2%, but many are still off their all-time highs.
| Rank | Company | Index Weighting | Percent Off All-Time High |
|---|---|---|---|
| 1 | Apple | 12.2% | (16.7%) |
| 2 | Microsoft | 11.8% | (22.7%) |
| 3 | Amazon | 6.5% | (47.3%) |
| 4 | Nvidia | 4.1% | (32.9%) |
| 5 | Alphabet (C Class Shares) | 3.9% | (37.4%) |
| 6 | Alphabet (A Class Shares) | 3.9% | (37.2%) |
| 7 | Tesla | 3.7% | (48.9%) |
| 8 | Meta Platforms | 3.3% | (53.3%) |
| 9 | Broadcom | 1.9% | (11%) |
| 10 | PepsiCo | 1.9% | (7.3%) |
Source: Slickcharts and YCharts.
With those 10 stocks (representing nine companies due to Alphabet's split-class share structure) making up more than half the index -- and all but PepsiCo, Broadcom, and Apple down more than the overall index -- then I'd say the Nasdaq 100 has a lot of room to run.
But some stocks within this index likely have a greater ability to rebound than the index itself. Here are three I think can do just that.
A few stocks have strong potential to outperform in 2023
Of those top 10 companies, I'd keep an eye on Amazon, Alphabet, and Tesla. It's not that the others can't have a good 2023; it's just that the environment is better for these three to excel and outperform the index.
Amazon's stock took a dive as the effects of the pandemic's e-commerce boost wore off, which exposed the company's overinvestment in its resources. Now, Amazon is fixing its mistakes and trying to return to positive free cash flow (FCF) by laying off workers, cutting programs, and making other cost-saving moves.
The company has already made great strides, cutting its cash burn from $26 billion in the second quarter to $11.6 billion in the fourth. The stock now trades at its lowest price-to-sales valuation since 2015, leaving it plenty of upside.
Alphabet's fall coincided with the economy slowing, as its clients curtailed their ad spending. With nearly 80% of total revenue coming from advertising sources, that's a problem.
However, as investors continue to see positive economic indicators, this revenue stream could open up again by the end of the year, giving Alphabet an explosive upside. And its cloud computing segment, Google Cloud, performed the best out of all the cloud providers, up 32% year over year while getting closer to profitability.
The stock is also at its lowest price-to-FCF valuation in a decade. Investors should be taking a look at this giant.
GOOG price-to-FCF data by YCharts.
Tesla is the stock with the most upside in the top 10. The electric vehicle (EV) maker recently cut prices to increase its competitiveness, but management still believes it can maintain a 20% gross margin (one of the best in the industry) across its production. It's slated to produce around 1.8 million EVs in 2023, compared to 1.37 million in 2022.
Of course, valuation will always be an argument with Tesla, but with the stock trading for 54 times earnings, it's at least in the ballpark of a more reasonably valued stock, although it's still very expensive.
The Nasdaq 100 still has a lot of room to run in 2023, and investors shouldn't be afraid of establishing a position in it. Furthermore, the tech-focused companies within it should also make for an excellent long-term investment.
But if you're looking for more significant upside than the broader index offers, Amazon, Alphabet, and Tesla make for smart individual investments that could outperform in 2023 and beyond.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Keithen Drury has positions in Alphabet, Amazon.com, Invesco Qqq Trust, Series 1, Nvidia, and Tesla. The Motley Fool has positions in and recommends Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool recommends Broadcom 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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
