The growth-centric Nasdaq Composite has bounced back sharply after a steep downturn last year. No one can know with certainty whether this marks the beginning of a new bull market, but plenty of solid companies are positioned to outperform for shareholders over the next several years.
Two that look very promising are Apple (AAPL +1.25%) and Netflix (NFLX 1.70%). Both stocks have been rising recently as investors price in more growth ahead. Here's why investors should consider adding these top stocks to their nest egg today.
NASDAQ: AAPL
Key Data Points
Apple
Apple is an iconic brand with a large base of loyal customers, but the iPhone maker is facing some near-term obstacles with sluggish demand and potential production hurdles for the new Vision Pro headset. Nonetheless, this is a valuable consumer brand worth buying before the economy revs up again.
The new Vision Pro headset received a muted response from investors when unveiled last month. The device won't launch until next year and will come with a hefty price tag. Apple is reportedly cutting production to less than 400,000 units, following an initial plan to make 1 million units in 2024. The production cut doesn't appear to be based on weak consumer interest but rather a shortage in micro-OLED (organic light-emitting diode) displays.
Meanwhile, iPhone sales, which generate half of Apple's revenue, grew slightly last quarter, while the rest of the product lineup experienced lower sales year over year. The consensus analyst estimate calls for Apple's revenue to decline 2.3% for fiscal 2023.
Some of the recent sales weakness can be attributed to high inflation and other economic issues. The economy won't always be facing headwinds like we've seen over the last year. Reasons the stock is still worth buying include the growing installed base of active devices and the company's enormous annual free cash flow that has swelled to almost $100 billion.
The growth in the installed base is particularly bullish for Apple's services business (e.g., App Store, subscriptions), which generates a much higher profit margin than hardware sales. Services revenue grew 5.5% year over year last quarter, which gives Apple the operational diversity it needs to maintain sales volumes when product sales weaken.
Apple delivered earnings growth of nearly 15% per year over the last decade. With over $385 billion in annual revenue, its size may limit earnings growth potential over the next 10 years. However, Apple's enormous free cash flows will allow management to continue rewarding shareholders through capital returns (e.g., quarterly dividends) and developing new products that keep revenue, and the stock, marching higher for many years.
NASDAQ: NFLX
Key Data Points
Netflix
Netflix stock has rebounded sharply after its tumble last year over subscriber losses. While the declines proved to be temporary, it shows that Netflix is starting to reach saturation in its largest markets. But Netflix could see accelerating revenue from its paid sharing initiative and the rollout of ad-supported subscription plans, which generate more revenue per subscriber than the basic plan.
In the streaming video market, there is Netflix and Alphabet's YouTube sitting on top, and then everyone else. Another streaming service that rivals Netflix in the breadth of content is Amazon Prime Video, but Netflix is known to have a greater variety of highly rated shows and movies. Netflix's subscriber total of 232 million is almost on par with Amazon's entire Prime membership base, which was over 200 million at the start of 2022.
One near-term obstacle Netflix will have to navigate is the ongoing writers' strike. In May, Netflix reportedly halted production for the next season of Stranger Things. Even if the strike results in more production delays, the company's existing content library, which is massive, is a valuable asset to maintain subscriber growth.
Netflix could enjoy a tailwind from its efforts to get more users to pay up for a subscription. Management had previously estimated over 100 million households were borrowing accounts. Converting even a small portion of those users into paying subscribers spells a significant revenue opportunity.
Quarterly subscriber growth has hovered around 5% over the last year, but paid sharing and growth in ad-supported plans should push average revenue per subscriber higher. This is a major catalyst for accelerating revenue growth. Analysts expect revenue to grow over 7% this year before accelerating to over 12% next year.
Based on management's second-quarter guidance, Netflix can convert this incremental revenue to more earnings growth, given it already generates an industry-leading operating margin of 19%. Analysts are forecasting 21% annual earnings growth over the next five years, which should push the stock much higher from where it trades now.
