A bull market is coming: 2 growth stocks you’ll regret not buying short

Inflation neared a 40-year high over the past year, forcing the Federal Reserve to raise interest rates at the fastest pace in four decades. Many economists fear these actions will inadvertently drive the economy into a recession, and that fear has led to a sharp decline in the stock market. As a result, the three major US indices, the S&P 500the Nasdaq Compositeand the Dow Jones Industrial Average – all fell into a bear market earlier this year.

But it’s not all bad news. Inflation has now decelerated for four consecutive months and 30% of economists polled by The Wall Street Journal they think the Fed will start lowering rates by Q4 2023, while another 28% expect rates to fall by Q1 2024. These trends could mend investor sentiment and lead to a new bull market. But even if that timeline does pan out, patient investors still have reason to be optimistic.

Every bear market in the past eventually ends in a new bull market, and there’s no reason to believe this one is any different. Meanwhile, quality stocks such as Microsoft (MSFT 1.04%) And PayPal holdings (PYPL 1.05%) they are trading 29% and 59% respectively from their highs. This creates a buying opportunity for these two growth stocks.

1. Microsoft: Provider of mission-critical cloud software and services

Microsoft is the foundation upon which hundreds of thousands of companies are built. Windows is the leading operating system for personal computers and data center servers, and Office 365 is the gold standard in productivity suites. But Microsoft has also carved out a strong position in other enterprise software markets. For example, Dynamics 365 ranks among the most popular enterprise resource planning (ERP) platforms, and the ERP software market is projected to grow 11% annually to reach $123 billion by 2030, according to Grand View Research .

Despite the uncertain economic environment, Microsoft has posted decent financial results over the past year. Revenues increased 15% to $203 billion and free cash flow increased 5% to $63 billion. Unfortunately, management issued disappointing guidance for the second quarter of fiscal 2023 (ending December 31, 2022), citing weaknesses in its Windows and advertising businesses. But those problems stem from high inflation, which is ultimately a temporary headwind. There are still plenty of reasons to be optimistic for shareholders.

For example, research company Gartner recognized Microsoft as a leader in several cybersecurity verticals, including endpoint protection, access management and information security, and event management. Better still, Microsoft grew its security customer base by 33% to 860,000 in the first quarter of fiscal 2023, and its strong market presence means the company should greatly benefit from the continued growth of the security market. cyber security. Grand View Research says cybersecurity spending will grow 12% annually to reach $500 billion by the end of the decade.

Microsoft Azure is the second largest public cloud and is gaining market share through expertise in database systems, developer tools, machine learning software, and hybrid computing solutions. In the most recent quarter, Azure accounted for 22% of global cloud infrastructure spending, up from 21% a year earlier. This momentum positions Microsoft as a key player in cloud computing for years to come, and the market is projected to grow 16% annually to reach $1.6 trillion by 2030.

Finally, Microsoft acquired ad technology company Xandr last year, and this move helped it land a major partnership with Netflix this year. Microsoft is the exclusive ad technology provider behind Netflix’s new ad-supported tier of its streaming service. That could make the company a key player in online video advertising, a market expected to grow 14% annually to reach $362 billion by 2027, according to research firm Omdia.

Microsoft has several large market opportunities, and shareholders can reasonably expect double-digit sales growth through the end of the decade. Shares look reasonably priced at 9.1x sales. That’s why this growth stock is a buy.

2. PayPal: The most accepted digital wallet in North America and Europe

PayPal operates a two-way payments network that provides financial services to businesses and individuals. Its merchant-facing platform enables businesses to engage with shoppers, accept payments, and prevent fraud in physical and digital stores. And its consumer-facing digital wallets allow users to discover commercial offers, earn interest, access credit and spend money online and in person.

This two-sided strategy distinguishes PayPal from most payment processors. It provides the company with insights into consumer behavior and purchasing preferences, which can drive sales for merchants. More broadly, it has enabled PayPal to build trust on both sides of the transaction, and trust is paramount in the financial industry. According to management, consumers are “twice as likely to shop” when PayPal is a payment option.

These benefits put PayPal in thin air. It is the most accepted digital wallet in North America and Europe and was the most downloaded mobile finance app in the world in the first half of 2022, according to Apptopia.

After a difficult start to the year, PayPal recently reported strong third-quarter results. Revenues increased 11% year over year to $6.8 billion and free cash flow increased 37% to $1.8 billion. But the most interesting updates have been the new links with Apple And Amazon.com. Later this year, merchants will be able to use Apple’s Tap-to-Pay service within the PayPal and Venmo iOS apps, and people will be able to add PayPal and Venmo-branded payment cards to their Apple wallets in 2023. , Venmo is now a payment option on Amazon.

Currently, PayPal places its addressable market at $110 trillion and has tailwinds working in its favor. Global digital wallet users will grow 53% to 5.2 billion by 2026, according to Juniper Research. During that time period, digital wallets will take the place of cash and payment cards in physical and digital stores, according to Worldpay.

With shares trading at 3.5x sales, a discount to the three-year average of 9.3x sales, this growth stock is worth buying.

John Mackey, CEO of Whole Foods Market, a subsidiary of Amazon, serves on the board of directors of The Motley Fool. Trevor Jennewine has positions in Amazon and PayPal Holdings. The Motley Fool has positions and recommends Amazon, Apple, Microsoft, Netflix and PayPal Holdings. The Motley Fool advises Gartner and recommends the following options: $120 March 2023 Long Calls at Apple and $130 March 2023 Short Calls at Apple. The Motley Fool has a disclosure policy.

Leave a Comment

%d bloggers like this: