After one of the worst years for the market in years, there are plenty of good opportunities to buy quality companies at more attractive prices.
Well-entrenched brands that generate a lot of cash would make great additions to any investor's portfolio. Let's take a look at two growth stocks poised to bounce back and deliver stellar long-term returns.
1. Apple
Shares of Apple (AAPL 1.27%) are down over 22% from their previous high. The stock currently trades at a price-to-earnings ratio of 23.4 based on this year's earnings estimates and pays a small quarterly dividend. After the dip, I believe the shares offer great value for one of the most valuable brands in the world.
Why is Apple unstoppable? The iPhone maker is sitting on $60 billion of net cash -- and that's on top of more than $100 billion in free cash flow coming through the door every year. Moreover, Apple is ranked the second most valuable globally, according to Brand Finance.
Data by YCharts
While Wall Street worries about how many devices the company will sell next quarter, Apple is loaded with cash to weather a weak consumer spending environment. Its massive cash pile is a strong fortress to continue paying dividends. Plus, Apple is not short of resources to keep investing in new innovations to create more demand. Apple is widely reported to be working on a self-driving car.
Apple is generating its highest gross profit margin in over 10 years. Gross profit jumped significantly over the last few years from about 38% of revenue to 43%, which has a lot to do with the growth in app sales and subscriptions through the App Store. It is also squeezing a little more profit out of its Mac lineup after replacing Intel's chips with its higher-margin proprietary M1 and M2 processors. When you generate as much cash as Apple does, you have the luxury of investing in new initiatives that keep squeezing more returns out of the business.
Apple is a cash gusher that will continue to find ways to reward shareholders over the long term. It has a knack for introducing new products that people don't think they need until they see them. That's tremendous brand power and explains why Apple is Warren Buffett's favorite stock.
2. Microsoft
Shares of Microsoft (MSFT 0.37%) are down 31% from previous highs and currently trade at a forward P/E of 26.7 with a 1.02% yield. Its recurring revenue streams from Office subscriptions and cloud services are why the stock deserves to trade at a premium.
Like Apple, Microsoft generates robust cash flows from its market-leading software products. Over the last year, it generated nearly $60 billion in free cash flow on $204 billion in revenue, but the main reason to consider buying the stock is its place in the cloud.
Data by YCharts
Microsoft is a solid No. 2 in the booming cloud infrastructure services market. Wall Street was disappointed with slowing growth in Microsoft's cloud business in the most recent quarter, but this is still a huge long-term growth opportunity for the software giant.
Microsoft's cloud business generated over $27 billion in revenue last quarter, growing 29% year over year, excluding currency changes. That should be enough for Microsoft Azure to hold its market share gains in recent years, where it has narrowed the gap with Amazon Web Services.
Cloud growth is an important reason to invest in Microsoft. The uncertainty in the economy might cause cloud spending to slow a bit this year, but it's not going away.
The adoption of cloud services by enterprises will continue to grow for many years, primarily because it saves companies money from not having to maintain on-premise data systems and hardware. This is why CEO Satya Nadella believes Microsoft is still in the early innings of long-term growth, and that's a good reason to buy the stock on the dip.
