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New Investor? Here Are 3 Great Starter Stocks

By John Ballard - Jan 16, 2021 at 8:15AM

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These incredibly strong technology companies should deliver returns for many years.

Investing can sometimes seem overwhelming for those just starting out, given the thousands of stocks to choose from. A good start for finding the best path to success is to invest in the companies you're familiar with.

It's equally important to invest in businesses that have a record of growing profits because that is the most basic ingredient that pushes stock prices higher over the long term.

With that said, here are three profitable and growing companies whose products are widely used and should remain great investments. Let's take a closer look at these three great starter stocks.

A hand holding a white arrow over an ascending stack of coins with little house figurines sitting on top of each stack.

Image source: Getty Images.

1. PayPal's brand ubiquity is driving growth

The tsunami wave of people using digital wallets to conduct transactions in the global economy is a powerful megatrend driving growth at PayPal Holdings (PYPL -3.45%). The stock price is up 545% since spinning off from eBay in 2015, but PayPal still has many years of above-average growth ahead. 

PayPal has built a trusted brand that 361 million customers rely on for secure transactions online. In addition to its core PayPal-branded platform, it also operates the popular Venmo app, where peer-to-peer payment transactions are exploding. In the third quarter, Venmo processed more than $44 billion in payment volume, representing an increase of 61% year over year. 

Over the next year, management will transform the functionality of the PayPal and Venmo apps to drive even higher engagement. New features will include enhancements to direct deposit, cashing checks, and other personal finance tools. This is part of PayPal's long-term goal to help those who are underserved by the traditional banking system. 

Essentially, PayPal is investing to become the digital bank of the future, which speaks to its massive growth potential. Across all of the company's payment services, including its Xoom cross-border money transfer business, total payment volume grew 36% in the third quarter, reflecting the enormous opportunity that PayPal is tapping into. 

The stock is up 110% over the last year. But as PayPal rolls out its QR codes for in-store payments and continues to sign up new users to its platform, investors should count on more gains over the next decade.

2. Apple is entering a strong product cycle

Apple (AAPL -5.85%) is one of the world's most recognizable brands. Its ability to sell its products at premium prices has made it a profit machine that should be in your stock portfolio. In fiscal 2020, Apple sold $274 billion worth of products and services, and it converted those sales to $57 billion in net profit. That's a great business.

The only problem is that Apple has become such a large company, it's getting more difficult to drive year-over-year increases in revenue.

Still, despite modest upticks in revenue and profits over the last three years, Apple stock has nearly tripled in value, with most of those gains coming in 2020. Those returns can be attributed to growth catalysts on the horizon that investors are excited about.

One positive indicator for future profit growth is that Apple continues to see strong uptake of its subscription services, including iCloud, Apple Music, Arcade, News+, and its credit card. Investors like this business since subscription revenue generates a gross profit margin that is double the level of hardware products.

Apple could also see an acceleration in revenue growth this year from higher sales of the iPhone 12 and the new M1-powered Macbooks. The tech titan's new M1 chips are estimated to cost less than the Intel processors they are replacing. Couple the lower chip costs with the fast-growing, higher-margin services business, and investors are seeing a lucrative future for the iPhone maker.

3. Microsoft is extending its software dominance to the cloud

Like Apple, Microsoft (MSFT -4.78%) is one of those ubiquitous tech companies that seem to be everywhere. Its software is nearly impossible to live without, even for those who are wrapped up in the Apple ecosystem.

Even if you don't use Office software, or play video games on a Windows PC or the Xbox console, you might work for a company that hosts its IT systems using Microsoft Azure, one of the largest cloud service providers in the world.

But most consumers know Microsoft for its Office 365 software, which now has 45 million subscribers. The transformation of this offering into a cloud subscription service has been a boon for the company. The productivity and business processes segment saw revenue increase by 11% year over year in the fiscal first quarter, which also included growth in commercial sales of Office and LinkedIn.

On the enterprise services side, Azure continues to make serious headway in the cloud infrastructure services market, with revenue surging 48% year over year. The intelligent cloud segment is now Microsoft's largest source of revenue, bringing in $13 billion in the last quarter, representing 35% of the company's total business.

Since the shift to a cloud services strategy, Microsoft stock has rocketed 307% over the last five years, yet analysts see more growth ahead for the software giant. For fiscal 2021, revenue is expected to climb 10%, with profits increasing even faster. 

Microsoft is also positioned for growth in gaming, a $175 billion industry, with the recent launch of the Xbox Series X and investments in its Xbox Game Pass subscription service. All told, Microsoft remains a top growth stock that should deliver returns for many years.

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Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
AAPL
$140.51 (-5.85%) $-8.72
Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
$254.06 (-4.78%) $-12.76
PayPal Holdings, Inc. Stock Quote
PayPal Holdings, Inc.
PYPL
$77.00 (-3.45%) $-2.75

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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