The Nasdaq Composite index is down about 13.3% year-to-date. You can bet there are several top stocks in that index that are getting unjustifiably punished in this broader market downturn that will go on to deliver great returns over the next five years. But which of those stocks should you buy today?
It takes a strong business to consistently grow revenue, but an even better one to do that while expanding operating margin. Earning a higher margin on every dollar of sales helps profits grow faster than revenue. Since stocks follow a company's long-term value over time, a company's ability to squeeze higher margins out of its operations can have a huge impact on shareholder returns. If you buy shares of companies that are showing improvement in these two numbers, you are on the way to building wealth through stocks.
Here are two growth stocks that meet these criteria that I would consider buying today.
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1. Nvidia
Nvidia (NVDA -1.41%) was one of the best-performing stocks of the last 10 years. The company had a lot of success expanding its PC graphics cards to accelerated computing applications. Areas like autonomous vehicles, robotics, data science, and anything involving artificial intelligence require immense processing power that only a graphics processing unit (GPU) can handle adequately. This has been right up Nvidia's alley, as it's been the leading supplier of desktop computer graphics for many years.
High-performance processors carry higher selling prices, and that means higher margins. Over the last three years, Nvidia's revenue has nearly doubled, while operating margin has improved roughly 10 percentage points to 37.3%. The improvement in margin fueled Nvidia's earnings per share up 190% and drove the stock higher.
NVDA Operating Margin (TTM) data by YCharts
With Nvidia now starting to offer software solutions in addition to chip hardware, margins should continue trending higher. The prospect of higher profits makes the stock even more attractive after falling 38% from its recent highs.
2. Apple
The 5G upgrade cycle is in full swing, and Apple (AAPL 0.60%) is reaping the rewards. For the December quarter, Apple reported record iPhone revenue. While one analyst found evidence of weak demand for the cheaper iPhone SE that was released in March, overall demand for the iPhone remains strong.
The stock is down 3.8% year-to-date, which is outperforming the Nasdaq's loss of 13.3%. Apple's outperformance during this market correction could make the stock a market leader in the next bull run.
Investors must love the growth of the installed base of devices, which increased from 1.65 billion a year ago to 1.8 billion at the start of 2022. Record levels in the number of active devices are fueling demand for services, such as apps and subscriptions. Even after growing 24% year over year in the December quarter, services revenue still makes up less than 20% of Apple's business.
The great thing about this is that services generate a higher margin than sales of hardware. As Apple's revenue accelerated during the pandemic, so did its operating profit margin, which rose about five percentage points to 31% over the last four quarters.
AAPL Operating Margin (TTM) data by YCharts
Strong demand for the iPhone 13 is a catalyst for growing demand in Apple's higher-margin services business. A healthy upgrade cycle could grow Apple's installed base to another record high this time next year. As services revenue continues to grow, so should Apple's profitability.
Invest with a long-term mindset
No matter what happens with the stock market in the near term, owning companies that are growing and becoming more profitable should make you money over the long term.
