When it comes to growth stocks, there are some who believe the big, established companies are past their prime and that true growth can only come from smaller businesses that are on their way up.
While it's true that large-cap companies are typically past their hyper-growth phases, the recent earnings reports from Apple (AAPL 0.51%) and Microsoft (MSFT 0.46%) suggest there's still plenty of reason to buy their shares. These are two stocks that fit the "buy-and-hold forever" model quite well. Here's why.
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1. Apple
Apple reported its first-quarter 2022 earnings on Jan. 27, and the company did not disappoint. Revenue was a record $124 billion, up 11% year over year and beating estimates by $5 billion. The company saw growth in every product area other than the iPad and in every geographic area except Japan. Apple's earnings per share of $2.10 was a 25% increase over Q1 of 2021 and well above the estimate of $1.89. The company ended the quarter with $203 billion in cash and marketable securities.
Apple's ability to grow revenue and increase profits at these rates while operating at a $2.8 trillion market cap is impressive in its own right. However, investors also have the benefit of a management team that prioritizes shareholder value. During the quarter, Apple paid over $3 billion in dividends and bought back $14 billion of its shares. In fact, over the past five years, Apple has reduced its share count by over 20%. Over that same time frame, the stock price is up 388%.
While there's no guarantee this rate of growth will continue, the results Apple has seen in one important category should give investors some confidence that it can keep this growth train going. Services revenue (which includes sales from AppleCare and digital content subscriptions) grew 27% in fiscal 2021, the third-highest growth segment after the iPhone and iPad. Because the services segment comprises much higher margin sales (70% compared to the products segment gross margin of 35%), this growth is accretive to the company's profitability. One of Apple's strengths is how it uses its hardware to pull customers into its ecosystem of subscription-based services. Continued growth in the services segment shows this strategy is paying off and should provide future revenue growth above and beyond the rising hardware sales.
There's also the seemingly never-ending parade of rumors that Apple is working on augmented reality glasses and/or a self-driving car. These rumors should not be the sole reason for an investment, but Apple does have an impressive track record of bringing new product categories to market with fantastic results. For example, Apple's most recently launched product category, the Apple Watch, has already gained 34% market share. If Apple is able to replicate that success with another new product, even more growth is in store for shareholders.
2. Microsoft
As investors have come to expect, Microsoft's second-quarter 2022 earnings were another demonstration that even as one of the largest companies in the world, Microsoft can still put up impressive growth. Revenue increased 20% year over year to $52 billion; operating income was $22 billion, a 24% jump; and net income was $19 billion, up 21%. Turning to the balance sheet, the quarter ended with over $125 billion of cash, cash equivalents, and short-term investments.
Some of that cash has already been allocated. A few days prior to issuing its earnings report, Microsoft announced it would be acquiring video game company Activision Blizzard for $69 billion. This move puts gaming front and center as Microsoft's management sees a growth opportunity for gaming. The move is also another step by Microsoft into the emerging metaverse market. Speaking about the acquisition on the Q2 earnings call, CEO Satya Nadella said, "[W]e are investing to make it easier for people to play great games wherever, whenever, and however they want, and also shape what comes next for gaming as platforms like the metaverse develop."
Microsoft is no stranger to the metaverse. The company's Minecraft franchise was helping its users create virtual worlds long before metaverse became a buzzword. Many companies are interested in the metaverse and if Microsoft can gain a strong gaming foothold there, that would be another driver of shareholder value for years to come.
How much of an impact gaming ultimately has on the overall business remains to be seen. However, Microsoft's cloud business remains its largest growth driver. Microsoft's Azure and other cloud-services revenue increased 46% year over year, and some notable businesses became customers when CVS Health, Johnson & Johnson Medical Devices, and Wells Fargo signed on during the last quarter.
Cloud should continue to be vital to Microsoft's future as the global cloud computing market is expected to more than double by 2026. As the second-largest cloud infrastructure provider, Microsoft is poised to see years of continued growth simply by the expected expansion of that market.
Investor takeaway
Both Apple and Microsoft are businesses that are likely already in many investors' portfolios. These recent quarterly results confirm their strong positions in the tech space. Add the fact that both businesses have sold off a bit in 2022 for reasons clearly unrelated to their business performance, and these two stocks are no-brainers to buy now and hold forever.
