This article was originally published on Forbes on Jan 4, 2024,11:27am EST

The Nasdaq 100 capped off 2023 with a return of +53.8%, erasing 2022’s losses and recording its highest annual return since 1999. This year had countless winners, but 5 stocks surprised and shocked the market with significant outperformance relative to the broader indices.

We think it’s important to pause and draw some parallels around the stocks that performed well in 2023 to form an opinion on what might perform well in 2024, as well as identify common themes that are seeing high levels of investor interest, such as AI.

Below, we review five top stocks of 2023, selected based on their price action and strong fundamentals. Choosing a top 5 means many great stocks were left off this list, yet this sample helps to form conclusions around how 2023 shaped up as a different trading environment from years past.

Read about our Top 5 Stocks from 2022 here.

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Nvidia

It wouldn’t be a top 5 list without Nvidia, with shares surging past a $1 trillion valuation as the company rapidly became the face of the AI revolution taking the market by storm. One phrase from CEO Jensen Haung sums it up nicely: Generative AI is the largest TAM expansion of software and hardware that we've seen in several decades.

Nvidia has added $800 billion in market cap this year as data center revenues continue a streak of triple-digits YoY growth due to soaring AI chip demand. Data center revenues have risen from a record $4.28 billion in Q1 this year to $14.51 billion in Q3 – a 217% increase in just two quarters. Total revenues for the data center are projected to reach $46.6 billion this year as Nvidia is expected to ship at least 550,000 of its highly popular H100 GPUs. 

Source: Twitter

Regardless, the market has rewarded Nvidia handily for building an AI GPU empire so strong, every major cloud provider, from Amazon to Microsoft to Google to Oracle and others, are all scrambling to secure supply. Revenues for fiscal 2024 are projected to increase 118% YoY to $58.9 billion, followed by another 53% YoY increase to $90 billion for fiscal 2025, and it’s this growth at such a scale that has driven Nvidia’s outsized returns this year. The Street is also rewarding Nvidia’s strong margins and FCF generation, as it had the best cash flow margins of the Magnificent 7 in Q3: a 40.5% operating cash flow margin and 39.8% free cash flow margin.

2023’s market has seen very narrow leadership, and Nvidia has been one of the de facto leaders within that narrow leadership.

The I/O Fund was early to this year’s move in Nvidia with a bold analysis in 2021 that claimed Nvidia will surpass Apple in valuation. In January of 2023, Beth also stated Nvidia was a top pick for 2023. Later, it became one of the best performing stocks of the year. Sign up today to stay on the leading edge with Nvidia and get an update on the long-term thesis in the coming weeks, with details on how Nvidia will close-in on the next trillion in market cap.

Meta

Meta’s 194% rally sees it join the top 5 list, as its turnaround story has been nothing short of remarkable in 2023. Financials and margins are rapidly improving, while Meta continues to invest and make progress in advancing AI.

Even though Meta’s LLaMA 2 large language model has made headlines for its performance and its tie-ups with Amazon’s AWS and Microsoft’s Azure, the force behind Meta’s rally lies within its financial recovery. Meta recorded one of its best days in more than a decade in February as the market rewarded a revenue beat and a positive outlook for Zuckerberg’s ‘Year of Efficiency,’ which the company would go on to do just that.

Acceleration in ad impressions in 2023 provided a needed lever of growth as pricing remained weak relative to 2022, and Meta returned to growth in Q1 with revenues up 2.6% YoY. It has since seen revenue growth accelerate, posting 23.2% growth in Q3 ahead of a forecasted 21.1% for Q4.

Source: YCharts

The Year of Efficiency is paying off, as Meta demonstrated substantial improvement in operating leverage. Gross margins expanded from 74% in Q4 last year to 81.8% in Q3, and a hyper-focused approach on cutting expenses saw operating margin more than double over 9 months, from 19.9% in Q4 to 40.3% in Q3. Net margin also expanded significantly, from 14.5% to 33.9%. Driving this rapid of a recovery in the bottom line combined with a 20-percentage point reacceleration in revenues at a >$120 billion annual run rate is what marks 2023 as an especially strong year for Meta.

Palo Alto Networks

Palo Alto returns to the top 5 list after being featured in last year’s edition, with shares up 111% as cybersecurity has been one of the strongest sectors this year. Palo Alto’s stance as a one-stop cybersecurity shop offers what we previously called the “best of both worlds” – it has potential to accelerate revenue growth from its platform approach, and has an enviable bottom line.

The market has rewarded Palo Alto for its shift to become “firmly GAAP profitable,” a key differentiator from a majority of other cloud stocks. Gross margin expanded 440 bp to reach another record level at 74.8% in the most recent quarter. Operating margin increased 1050 bp from 1% a year ago to 11.5%. This strong increase in operating leverage has greatly benefited Palo Alto’s bottom line, with net margin at two consecutive quarters above 10%.

Source: YCharts

Palo Alto is reporting strong underlying metrics, especially with its next-gen offerings. Next-Gen Security ARR increased +53% YoY to $3.23 billion, and SASE ARR increased +60% YoY. Palo Alto witnessed very strong growth in multi-module customers, with +155% YoY growth in those adopting 5+ modules, and +59% YoY growth in those adopting 3+.

We discussed in early October how cybersecurity will be the next industry disrupted by AI, and the market is already looking to select the frontrunners in this trend. Palo Alto and peer CrowdStrike, an honorable mention on the list, are two of the market’s favorites in 2023 stemming from GAAP profitability and strong cash flow.

Duolingo

It might be the odd one out on this list for many tech investors, but Duolingo (DUOL) is not to be ignored: it has proven this year that it’s a textbook growth stock, boasting a 219% return. It’s also hard to argue with the strength of Duolingo’s growth flywheel, as active user metrics, paid subscribers, and bookings grow at a blistering pace.

Source: Duolingo

MAUs increased 47% YoY to 83.1 million, the third straight quarter with growth above 47%. DAUs rose 63% YoY to 20.3 million, the fourth quarter in a row with growth above 62%. Paid subscribers also rose 60% YoY to 5.8 million. Bookings growth has accelerated each quarter this year, from 37% in Q1, to 43% in Q2, and now to 49% in Q3.

Revenue is on the verge of breaking $500 million on a TTM basis, and bookings have topped a $600 million annual run rate. While it is easier to see hypergrowth at a smaller scale of revenue, Duolingo is showing no signs of slowing – very few hypergrowth stocks, if any, can say the same this year.

One other factor behind Duolingo’s stellar year is a shift to two consecutive quarters of GAAP profitability, and strong expansion in adjusted EBITDA margins. GAAP net margin in Q3 was 2%, and though it is razor thin, the market is looking forward to how revenue hypergrowth will translate to increased operating leverage, and ultimately, a strong net margin expansion. Adjusted EBITDA margin was above 16% in both Q2 and Q3, up from the 2% range last year – a hint of what the Street is anticipating for the bottom line.

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Palantir

Palantir rounds out the top five as another Street favorite in AI, with the company’s Artificial Intelligence Platform (AIP) driving an acceleration in growth. Palantir is seeing strong growth in its US commercial segment due to AIP, which launched in June and has since seen remarkable growth. A shift to GAAP profitability and an ensuing four consecutive quarters with GAAP profits cemented its spot as a top tech stock with a 167% rally this year.

Source: YCharts

Palantir nearly tripled the number of AIP users in the past quarter, with over 300 organizations using the new product in the last 5 months. Palantir can “more aggressively invest” in AIP and other AI products without sacrificing margins due to its GAAP profitability, a key differentiator from a majority of cloud AI plays, who are investing in growth at the expense of margins.

The US commercial business accelerated in Q3, rising 52% YoY and 19% QoQ, due to the “rapid expansion of AIP at both our existing and new customers.” This acceleration in a key segment combined with strong adoption of an AI model has sparked optimism, with shares adding +34% in November before pulling back in December.

The market is forward looking, and in Palantir’s case, the market is looking forward to a revenue reacceleration in 2024, another catalyst for the rally Palantir has enjoyed this year. Revenue growth is poised to accelerate in Q4 and through 2024, boosted by AI demand, reacceleration in Palantir’s US government segment, and continued strength in the US commercial side. Palantir is projected to report 18.5% YoY growth in revenues in Q4, the highest in five quarters, and 2024 is expected to see a marked acceleration — current projections point to a 320 bp acceleration in Palantir’s revenue growth rate to 19.7% YoY.

Conclusion

Looking back at 2023 is important as it often provides clues for tech investors as we move forward into 2024. Winners keep winning, and that is one reason we like to reflect on the clear winners from the previous year.

The stocks above have proven they do not need good or easy conditions to perform well. It can be hard to have a repeat year as often investors will take gains, and there’s certainly gains to take in the five stocks listed above. Therefore, we are searching for patterns rather than attempting to exactly repeat 2023. This pattern is expanding margins, strong cash flows, shifts to GAAP profitability, and any hint or sign of accelerating revenue growth.

Recommended Reading:

• Ad Spending Growth to Accelerate In 2024
• Nvidia’s Fiscal Q3 Earnings Preview: The Pressure Is On
• Big Tech Stocks: Q3 Earnings Preview
• Palantir, Three Other Cloud Stocks Poised For An Acceleration In 2024