New Investor? Here Are 3 Great Starter Stocks

As a new investor, it's important to consider your risk tolerance. Some people may be more comfortable with exchange-traded funds (ETFs), while others may prefer to pick stocks. If you decide on the latter, bear in mind you'll need do your homework. It's important to understand a company before you buy shares.

Personally, I own over 30 stocks, but I think 15 is a good initial target. Don't panic -- you don't need to buy them all at once. Work toward that goal at your own pace. And as a starting point, consider investing in Microsoft (MSFT -2.45%), PayPal (PYPL -1.14%), and Okta (OKTA -0.89%). Here's why.

Microsoft

Microsoft is the largest software-as-a-service company in the world, and the second-largest provider of public cloud services. The Microsoft 365 suite includes industry-standard office applications like Word and PowerPoint, collaboration tools like Teams, cybersecurity solutions like Microsoft Defender, and other enterprise offerings.

Image source: Getty Images

In cloud computing, Microsoft Azure has gained significant market share in the last few years, rising from 14% in Q4 2017 to 20% in Q4 2020. This growth has been driven by investments in geographic expansion, as well as Microsoft's efforts to enhance key services like data analytics and artificial intelligence.

The investment thesis for Microsoft is straightforward: Office software is an essential resource for most enterprises, and Microsoft 365 is the clear market leader. In fact, it's the most popular enterprise software product in any category.

Likewise, cloud computing is becoming increasingly popular, as it offers a more convenient and cost-effective option for clients. In addition, Microsoft recently launched Azure Percept for edge AI and updated Azure Arc for hybrid clouds, both of which are core to its growth strategy. These products address quickly growing industries, which should help Azure continue to gain market share.

Compared to PayPal and Okta, Microsoft trades at relatively cheap multiples: 11 times sales and 33 times earnings. Microsoft is also much larger, with a market cap of $1.8 trillion. Generally speaking, that indicates less long-term upside. However, the company's titanic size is also an incredible advantage, allowing it to outspend and operate more profitably than many rivals. That's why Microsoft looks like a good long-term investment.

PayPal

PayPal provides a variety of payment products, ranging from merchant-facing processing services to consumer-facing mobile apps like Venmo.

The company has achieved significant scale, reaching 392 million active accounts in the most recent quarter. PayPal has also demonstrated its ability to create value for merchants. For instance, according to research from Nielsen, when businesses accept PayPal, they see 17% more repeat buyers and benefit from 34% more total checkouts.

Since the beginning of the pandemic, PayPal has launched several new services designed to increase user engagement, including the ability to buy, sell, and make payments with cryptocurrency like bitcoin. Those initiatives are paying off. Growth in total payment volume (TPV), the value of all payments facilitated by PayPal, increased 50% in the first quarter of 2021. That's a big acceleration over 18% TPV growth in Q1 2020.

Over a longer period, PayPal has delivered an impressive financial performance.

Data source: PayPal SEC filings. TTM = trailing-12-months. CAGR = compound annual growth rate.

Going forward, the bull case for PayPal centers on digital payments and e-commerce. Cash lacks the convenience and security offered by digital wallets and payment cards, and online shopping is gaining popularity around the world. Both of those forces should continue to drive the adoption of PayPal's platform in the coming years.

Okta

Okta provides identity and access management (IAM) solutions that address both workforce and consumer use cases.

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For instance, employees use Okta to securely access critical services and applications, whether they are in the office or working remotely. And IT administrators use Okta to manage the employee lifecycle, granting access during on-boarding and removing those privileges at termination.

Despite competition from larger rivals like Microsoft, Okta's neutrality gives it an advantage. Because the company doesn't sell cloud services or other software products, there's no conflict of interest with any technology. In fact, Okta has every reason to support as many different services, applications, and clouds as possible.

That flexibility has brought over 10,000 clients to Okta's platform, driving integrations with over 7,000 applications and IT infrastructure providers. Notably, that scale creates a strong network effect. As new customers join, Okta collects more data (user behavior, endpoint security signals, etc.), improving its ability to detect threats, which enhances its value to all customers.

Okta has delivered strong revenue growth in recent years, and the company has been free-cash-flow positive since fiscal 2020 (ended Jan. 31, 2020).

Data source: Okta SEC filings. Note: fiscal 2021 ended Jan. 31, 2021. CAGR = compound annual growth rate.

Looking ahead, digital transformation should be a powerful growth driver for Okta. Enterprises are becoming more reliant on cloud computing, software-as-a-service, and remote work -- all of which create a need for effective security. The Okta Identity Cloud meets that need.

As a caveat, Okta is likely the riskiest of the three stocks I've just discussed. It's not profitable, trades at 34 times sales, and has a market cap of $34 billion, meaning it's a smaller company and a pricier stock than either Microsoft or PayPal.

But that's not necessarily bad. Okta's smaller size could mean greater long-term upside. In fact, during a recent interview, Chief Marketing Officer Kendall Collins said Okta could eventually be bigger than Salesforce, a $200 billion software giant. If that prediction comes true, it would mean almost 500% upside for investors.