Today's high inflation is a good reminder that your savings need to grow just to keep your purchasing power intact. The best way to do that may be growth stocks and dividend growth stocks, which, after the recent tech sell-off, are now trading at much better valuations.
Times of market turmoil are uncomfortable, but usually the best time for long-term investors to put money to work. Here are three growth stars with competitive advantages, giving them staying power and a path to making today's investors rich decades out into the future.
Microsoft (MSFT 0.67%) would make an excellent core holding for both aggressive and defensive investors. Its legacy operating system is an entrenched part of most personal computers in the world, and its software franchises including the Office productivity suite and Dynamics enterprise resource planning suite are cash cows that are growing at a solid pace. Meanwhile, Microsoft's solid number two position in cloud computing has given it a rising growth star, with the Azure cloud platform growing 46% last quarter. The company has also been making thoughtful acquisitions over the past few years under CEO Satya Nadella, into social media with LinkedIn, developer tools with GitHub, and video games, with acquisitions of several game studios culminating in a recent offer to buy Activision Blizzard.
Microsoft's sprawling empire thus has a nice combo of cash cows, growth stars, and emerging products and services, compounding your investment dollars at very high returns on invested capital. Add in a growing 0.9% dividend and consistent share repurchases, and investors get a bit of everything, including cash returns and impressive growth.
Microsoft might not look cheap at 31 times earnings, but when you consider it has a higher credit rating than the U.S. government, and that the 30-year U.S. Treasury bond only yields 2.25% today, Microsoft's 3.3% earnings yield looks pretty good. That's especially true since those earnings are still growing over 20% per year despite the company's huge size.
You may have heard that we are in a semiconductor shortage, due to the boom in digitization coming out of the pandemic. The importance of chips and chip-making has never been more at the forefront, as evidenced by developing nations set to give billions in subsidies to chip companies just to keep some capacity on their own shores. Yet due to the wider tech sell-off, the semiconductor index is down about 14% to start the year.
The sell-off has been especially bad for higher-multiple chip stocks like ASML Holdings (ASML 1.38%), which is down 18.6% for the year and 27.4% from all-time highs set back last summer. Still, ASML deserves a high multiple, given that it has a monopoly on extreme ultraviolet lithography (EUV) -- a key technology to producing leading-edge chips.
EUV tools only began to be used a few years ago for leading-edge logic chips, and all the major DRAM memory companies are now beginning to use EUV on current and future nodes. So, we are still in the early innings of EUV usage.
Although ASML projects solid 25% shipment growth this year, its growth is still severely constrained by supply chain and logistics problems. On the last conference call with analysts, CEO Peter Wennink said for many of its tools, shipments were 40% below current demand.
Amid interest rate fears, ASML has now rerated to a more palatable 40 times trailing earnings. But like Microsoft, it offers a compelling combination of cash returns in the form of buybacks and a growing 1% dividend, along with inevitable earnings growth well into the future. It's another quality stock to buy amid this year's sell-off and tuck away for decades.
Unlike the previous two stocks, cybersecurity disruptor CrowdStrike (CRWD 1.29%) doesn't pay a dividend or buy back stock... at least not yet. However, when looking out five or 10 years, that could very well be a possibility.
CrowdStrike takes its name from its business model. The company amalgamates threat data from endpoints across all its customers into a single, centralized threat graph that gets smarter from that data. A company that gets stronger as it gains more customers benefits from what's called a network effect, which is a powerful advantage that gives a company excellent staying power.
Fortunately for CrowdStrike but unfortunately for the rest of us, cyber-threats are only proliferating. The Biden Administration recently issued stricter new guidelines for large businesses and government agencies to update their cyber systems, meaning more and more companies will now be compelled to buy best-in-class solutions like CrowdStrike's.
CrowdStrike is also investing aggressively to capitalize on that opportunity, both internally and through several acquisitions to augment its core endpoint protection offering into a comprehensive cyber platform. Management anticipates its addressable market could more than double over the next three years to $116 billion, if it succeeds in bringing new products to market.
CrowdStrike has also given an indication it could one day be quite profitable. The company's current free cash flow margin is 32%. While investors should be aware that leaves out significant stock-based compensation, the company doesn't seem to have pressing cash needs, and stock-based comp should diminish as a percentage of revenue over time as CrowdStrike scales.
Looking out a decade or more, CrowdStrike looks like a long-term winner. It still trades at a lofty 30 times sales, but it's down 43% from its November highs amid the growth-stock sell-off. Now may be a time for long-term investors to look at this leader in the high-growth cybersecurity industry.