If you're on the hunt for growth stocks that have what it takes to be long-term winners, it can pay to think big. While small-cap stocks might have more-explosive potential, large- and mega-cap companies often come with some distinct advantages and can still outperform their tinier peers in many cases.
Backing top companies with large established markets and strong competitive advantages can help minimize downside risk while still leaving the door open for strong returns. Within that mold, read on to see why two Motley Fool contributors think that Microsoft (MSFT 0.84%) and Netflix (NFLX 1.49%) have unstoppable edges that will translate into wins for shareholders.
This tech giant is positioned to win the future
Keith Noonan (Microsoft): Microsoft has never been stronger. Its transition to a service-focused model was successful and massively profitable. Its Azure cloud-infrastructure business continues to gain market share and is serving up strong margins. And even though opportunities in operating-system software and some other categories have diminished, the company is actually gearing up for a new growth phase.
Microsoft probably isn't the first name everyone thinks of when the topic of cybersecurity comes up, but that's likely to change quickly. Last year, its cybersecurity business rose 33% annually to reach $20 billion in sales, and growth in the category is likely just getting started. Given the company's strong positions in cloud-infrastructure services, operating systems, office productivity software, and other categories, Microsoft has cross-selling opportunities and the ability to gather and integrate data that can lead to better performance.
The other big component of Microsoft's new growth phase is artificial intelligence (AI). Not only will integrating AI-powered services benefit its OS and productivity software, it will also help attract new customers and expand business relationships on Azure.
Thanks to the strength of its cloud business, Microsoft is positioned to help facilitate and benefit from the rise of the broader AI software and services space. Between its tech resources and access to valuable data, few companies even come close to matching the company's strengths in artificial intelligence.
MSFT dividend data by YCharts.
Besides the continued capital appreciation potential for the stock, Microsoft also has appeal as a dividend growth stock. The current yield of roughly 0.8% won't delight those seeking big income generation right away, but the company has raised its payout roughly 62% over the last five years and 196% over the last decade.
Netflix has major studios copying the streaming model
Parkev Tatevosian (Netflix): Survival might have been questionable for Netflix when it first started as a disruptor to the traditional video content industry. But after nearly two decades of phenomenal success, its longevity is no longer in doubt. The streaming pioneer certainly made the list of stocks I recommend for the long term.
Netflix had over 238 million subscribers as of June 30. That figure increased by 8% from the same quarter the prior year. Those paying customers helped Netflix grow revenue from $6.8 billion in 2015 to $31.6 billion in 2022. As people continue canceling cable in favor of streaming, it would not be surprising to see Netflix drive subscriber numbers and revenue higher for several years.
It already earns healthy profits. Between 2015 and 2022, operating income rose from $306 million to $5.6 billion. With rivals jumping into the streaming industry in the last couple of years with both feet, Netflix's ability to expand amid rising competition should reassure investors of the sustainability of its profits.
NFLX PE ratio (forward one year) data by YCharts.
Netflix's stock is not the cheapest it's ever been. Still, trading at a forward price-to-earnings (P/E) ratio of 28, long-term investors can buy this streaming pioneer's stock at a reasonable valuation. And 20, 30, or even 40 years later, you could be thanking yourself for buying Netflix stock.
Microsoft and Netflix have what it takes to be winners
Investing in big companies doesn't have to mean giving up on seeing big returns. In fact, large-cap and mega-cap companies have been some of this year's best-performing stocks and played an outsize role in powering gains for the broader market.
Microsoft and Netflix each have powerful competitive advantages that should translate to continued sales and earnings growth, and both stocks look poised to deliver wins for long-term investors.
