Microsoft (MSFT -0.66%) and ASML Holding (ASML -7.09%) are two stocks listed on the Nasdaq that have pulled back substantially this year on account of several factors, such as potential interest rate increases from the Federal Reserve, the crisis in Europe, and surging inflation.
However, the pullback in their stock prices is an opportunity for investors to add long-term winners to their portfolios. That's because the products and solutions that Microsoft and ASML provide are going to remain in robust demand for years to come, enabling both companies to clock impressive revenue and earnings growth.
Let's look at the reasons these Nasdaq stocks are built for long-term upside.
1. Microsoft
Microsoft has come a long way from being a purveyor of operating systems that power millions of computers around the globe. The tech giant now has interests in several fast-growing areas ranging from cloud computing and video gaming to customer relationship management and social networking.
The multiple growth drivers that Microsoft now enjoys have led to impressive growth in the company's top and bottom lines over the past five years, culminating in solid upside on the stock market.
In the second quarter of fiscal 2022 as well, for the three months that ended on Dec. 31, Microsoft's revenue increased 20% year over year to $51.7 billion, and adjusted earnings increased 22% to $2.48 per share. Analysts expect Microsoft's revenue to increase 18% this fiscal year to $199 billion, while earnings are expected to jump 16% to $9.35 per share.
It won't be surprising to see Microsoft sustain such growth in the long run, or even grow at a higher pace given the moves the company has made of late or the markets it's operating in. The cloud computing market, for instance, is going to be a major catalyst for Microsoft in the coming years thanks to the secular growth opportunity it offers and the company's solid market share.
The cloud business produced 35% of Microsoft's top line in the previous quarter, with revenue growing 25% year over year to $18.3 billion. Synergy Research Group estimates that Microsoft's Azure cloud service controlled 21% of the $180 billion cloud computing market at the end of 2021. Market leader Amazon was the top cloud infrastructure service provider last year, with a 33% market share.
However, Microsoft has been gaining ground in the cloud computing market at an impressive pace over the years. The company had a 10% share of this market at the beginning of 2017, while Amazon's share of the cloud computing market has ranged between 32% and 34% during the same period. Microsoft's gains in the cloud computing space bode well for its future, as the global cloud computing market is expected to exceed $1.5 trillion in revenue by 2030, according to third-party estimates.
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The cloud business, however, is just one of the many megatrends Microsoft is on track to take advantage of. The metaverse, for example, is going to unlock another big opportunity for the company. After all, the metaverse is expected to create a $1 trillion annual revenue opportunity for its participants in the long run, according to J.P. Morgan.
Microsoft is already making moves to take advantage of the metaverse. The company's Mesh for Teams offering allows remote employees to collaborate within the metaverse, paving the way for stronger growth in Microsoft Teams userbase that currently stands at 250 million. Videogaming is another way Microsoft can benefit from the metaverse, given its recent moves.
The company announced in January that it will be spending $68.7 billion to acquire Activision Blizzard in a move that's not just expected to accelerate the growth of its gaming business but also help it build the metaverse. The acquisition will bolster Microsoft's videogaming business that generated just over $15 billion in revenue in fiscal 2021. The company also now has a stronger library of games to offer, which should allow it to sell more of its Xbox consoles and attract more members to the Xbox Game Pass videogame subscription service.
With videogaming expected to become a $314 billion market by 2027 thanks to catalysts such as the metaverse, Microsoft can benefit from several multibillion-dollar markets in the long run.
Finally, Microsoft is trading at 30 times trailing earnings right now, which is a discount to its five-year average earnings multiple of 37. So investors are getting a good deal on this beaten-down Nasdaq stock right now.
2. ASML Holding
The global chip shortage shows no signs of easing, as Russia's invasion of Ukraine is expected to cripple the semiconductor supply chain further by limiting the availability of key raw materials. As a result, chipmakers that haven't been able to make enough chips will be further constrained to meet the end-market demand. This situation could trigger an increase in investments in new manufacturing capacity, which in turn would bode well for ASML Holding.
ASML is a Dutch company that manufactures photolithography systems, which semiconductor foundries use to make chips. ASML is the leading supplier of photolithography machines, as it controls over 60% of this market. Meanwhile, ASML is the only manufacturer of extreme ultraviolet lithography (EUV) machines that the likes of Taiwan Semiconductor, Samsung, and Intel use to make advanced chips.
As a result, ASML is in a nice position to take advantage of the world's booming demand for chips. The EUV market, for instance, is reportedly clocking an annual growth rate of 25%, says TechNavio, and it could hit $19 billion in revenue by 2026. EUV machines accounted for 46% of ASML's 2021 revenue of $18.6 billion, which would translate into just over $8.5 billion in EUV sales. So the EUV business could more than double in revenue in the next five years, given ASML's hold over this space.
Not surprisingly, ASML expects its annual revenue to hit a range of 24 billion to 30 billion euros by 2025. That would translate into 45% revenue growth over 2021's top line of 18.6 billion euros over a four-year period.
What's more, ASML expects to clock annual revenue growth of 11% through 2030 as its customers ramp up investments in semiconductor manufacturing capacity to meet the growing demand for chips. Annual semiconductor revenue is expected to hit $1 trillion by 2030, compared with $425 billion in 2020, which explains ASML's robust long-term forecast.
Analysts also expect impressive growth in the company's earnings, with its bottom line expected to grow at an annual pace of nearly 30% for the next five years. All of this makes ASML Holding an enticing tech stock to buy following its 25% pullback in 2022, which has brought its price-to-earnings (P/E) ratio down to 37 , from last year's average earnings multiple of 53.
