Inflation hovered near a 40-year high over the past year, prompting the Federal Reserve to raise interest rates at its fastest pace in four decades. Many economists feared these actions would inadvertently push the economy into recession, and that fear led to a far-reaching downturn in the stock market. As a result, the three major US indexes — the index S&P 500the Nasdaq Compositeand Dow Jones Industrial Average — they all fell into a bear market earlier this year.
But that’s not all bad news. Inflation has decelerated for four straight months and 30% of economists surveyed by The Wall Street Journal think the Fed will start cutting rates in Q4 of 2023, while another 28% expect rates to fall in Q1 of 2024. Those trends could fix investor sentiment and provide a market new bull market. But even if that timeline fails, patient investors have reason to be optimistic.
Every past bear market will eventually end in a new bull market, and there is no reason to believe this one will be any different. Meanwhile, quality stocks like Microsoft (MSFT .) 1.04%) and PayPal Corporation (PYPL 1.05%) are trading at 29% and 59% of their highs respectively. That creates a buying opportunity for these two top growth stocks.
1. Microsoft: Important Software and Cloud Service Provider
Microsoft is the foundation on which hundreds of thousands of businesses 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 established itself firmly in other business software markets. For instance, Dynamics 365 ranks among the most popular enterprise resource planning (ERP) platforms, and the ERP software market is expected to grow 11% annually to reach $123 billion by 2030. , according to Grand View Research.
Despite the uncertain economic environment, Microsoft has reported positive financial results over the past year. Revenue increased 15% to $203 billion and free cash flow increased 5% to $63 billion. Unfortunately, management gave disappointing guidance for the second quarter of fiscal year 2023 (ending December 31, 2022), citing weak Windows and advertising business. But those troubles stemmed from high inflation, which ended up being a temporary headwind. There are still plenty of reasons for shareholders to be optimistic.
For example, a research company Gartner recognized Microsoft as a leader in several areas of cybersecurity, including endpoint protection, access management, security intelligence, and event management. Better yet, Microsoft increased its security customer base by 33% to 860,000 in the first quarter of fiscal 2023, and its strong presence in the market means that the company will benefit greatly as the market continues to grow. Cybersecurity continues to evolve. 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 thanks to its 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% the year before. That momentum makes Microsoft a key player in the cloud computing space for years to come, and the market is expected to grow 16% annually to reach $1.6 trillion by 2030.
Finally, Microsoft acquired ad-tech company Xandr last year, and that move helped it land a major partnership with the company. Netflix This year. Microsoft is the exclusive ad technology provider behind Netflix’s new tier of ad-supported streaming services. That could make the company a major player in online video advertising, a market that will grow 14% annually to reach $362 billion by 2027, according to research firm Omdia.
Microsoft has some big market opportunities, and shareholders can reasonably expect double-digit revenue growth through the end of the decade. Fairly priced stock with 9.1x sales. That’s why this growth stock is a buy.
2. PayPal: Most Accepted Digital Wallet in North America and Europe
PayPal operates a two-way payment network that provides financial services to businesses and individuals. Its merchant-facing platform enables businesses to attract buyers, accept payments, and prevent fraud across physical and digital stores. And its consumer-facing digital wallet allows users to discover purchases, earn interest, access credit, and spend money online and in person.
That two-pronged strategy sets PayPal apart from most payment processors. It gives the company insight into consumer behavior and shopping preferences, which can drive sales for merchants. More broadly, it allows PayPal to build trust on both sides of a transaction, and trust is crucial in the financial industry. According to management, consumers are “twice as likely to shop” when PayPal is a payment option.
Those advantages put PayPal in rare air. It was the most accepted digital wallet in North America and Europe, and the most downloaded mobile finance app worldwide in the first half of 2022, according to Apptopia.
After a rough start to the year, PayPal recently reported solid third-quarter results. Revenue increased 11% year over year to $6.8 billion and free cash flow increased 37% to $1.8 billion. But the most interesting updates are the new relationships with Apple and Amazon. By the end of the year, merchants will be able to use Apple’s Tap-to-Pay service in the PayPal and Venmo iOS apps, and people will be able to add PayPal and Venmo-branded payment cards to their Apple Wallet. in 2023. Additionally, Venmo is now a payment option on Amazon.
Currently, PayPal puts its addressable market at $110 trillion, and it has favorable winds working in its favor. Global digital wallet users will grow 53% to 5.2 billion by 2026, according to Juniper Research. During that time, the digital wallet will share cash and payment cards in both physical and digital stores, according to Worldpay.
With the stock trading for 3.5 times sales, a discount to the three-year average of 9.3 times sales, this growth stock is well worth buying.
John Mackey, CEO of Whole Foods Market, a subsidiary of Amazon, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions in Amazon and PayPal Holdings. The Motley Fool has positions in and recommends Amazon, Apple, Microsoft, Netflix, and PayPal Holdings. The Motley Fool recommends Gartner and recommends the following options: a $120 long call call in March 2023 for Apple and a March 2023 short call call at $130 for Apple . The Motley Fool has a disclosure policy.