The Nasdaq Composite has rebounded sharply from last year’s decline. No one can say for sure whether this marks the beginning of a new bull market, but many solid companies may exceed shareholder expectations over the next few years, writes John Ballard in his column in The Motley Fool.
Two companies that look very promising are Apple and Netflix. Both stocks have been popular lately as investors expect further growth in the future. That’s why bidders should consider adding these top securities to their portfolios today.
Apple
Apple is an iconic brand with a large base of loyal customers. That said, the iPhone maker is facing some headwinds due to weak demand and potential difficulties in the production of its new Vision Pro headset. Still, it’s a worthwhile brand to acquire before the economy picks up again.
The new Vision Pro headset received a subdued response from investors when it was unveiled last month. The device won’t be available until next year and will come with a hefty price tag. Apple is reportedly cutting production to less than 400,000 units, following its original plan to produce 1 million units in 2024. The production cut is apparently not due to weak consumer interest, but rather a shortage of micro-OLED (organic light-emitting diode) displays.
Meanwhile, sales of iPhones, which generate half of Apple’s revenue, grew slightly last quarter, while sales of the rest of the product line declined year-over-year. Analysts’ consensus forecast is for Apple’s revenue to decline 2.3% in fiscal 2023.
Part of the recent sales decline can be attributed to high inflation and other economic concerns. Reasons why the stock is still worth buying include the growing installed base of active devices and the company’s huge annualized free cash flow, which has grown to nearly $100 billion.
The growing installed base is particularly favorable for Apple’s services business (e.g., App Store, subscriptions), which generates much higher margins than hardware sales. Services revenue grew 5.5% year-over-year last quarter, giving Apple room to maintain sales in the face of declining product sales.
Over the past decade, Apple’s profits have grown at nearly 15% a year. At more than $385 billion in annual revenue, its size may limit its profit growth potential over the next 10 years. Nevertheless, Apple’s huge free cash flow will allow management to continue rewarding shareholders through capital gains (e.g., quarterly dividends) and developing new products that keep profits and shares going up for years to come.
Netflix
Netflix’s stock has risen sharply after falling last year due to a loss of subscribers. While the decline appeared to be temporary, it shows that Netflix is starting to reach saturation in its biggest markets. But Netflix can boost revenue from its paid sharing and ad-supported subscription initiative.
Alphabet’s Netflix and YouTube lead the streaming video market, followed by everyone else. Another streaming service that competes with Netflix in terms of breadth of content is Amazon Prime Video, but Netflix is known to offer a greater variety of shows and highly rated movies. Netflix’s total of 232 million subscribers nearly matches Amazon Prime’s entire subscriber base, which stood at more than 200 million at the start of 2022.
One of the immediate obstacles Netflix will have to face is the ongoing writers’ strike. In May, Netflix reportedly halted production on the next season of Very Strange Things. Even if the strike leads to more production delays, the company’s existing huge library of content will support subscriber growth.
Quarterly subscriber growth was about 5% year-over-year, but paid shearing and advertising should increase average revenue per subscriber. This is an important catalyst for accelerating revenue growth. Analysts expect revenue to grow more than 7% this year and then accelerate to more than 12% next year.
Based on management’s outlook for the second quarter, Netflix could convert this revenue into additional earnings growth, given that it already delivers an industry-leading operating margin of 19%. Analysts are forecasting 21% annual earnings growth over the next five years, which should push the stock well above the levels we see now.
If Apple and Netflix aren’t enough for you, include more quality stocks in your portfolio
