The next bull market is coming, but it's impossible to tell exactly when stocks are going to move higher. Economic uncertainty might delay the next big surge in the market.
Still, investors can try to allocate assets wisely to ensure that they can benefit when the next bull market does come. These two growth stocks below are likely to play a big role whenever that occurs.
Palo Alto Networks
Palo Alto Networks (PANW 0.91%) is one of the leaders in the cybersecurity industry, which is experiencing strong demand catalysts. Digital threats are an increasing problem -- malicious actors are executing ransomware and other attacks at an increasing rate, and those attacks are becoming more efficient.
Palo Alto Networks' offerings include firewalls and other edge security products, which are important for protecting any organization's network. Its product portfolio receives high marks from customers and industry analysts, so the demand for Palo Alto's products should be strong for years.
Image source: Getty Images.
In the most recent quarter, Palo Alto reported 20% revenue growth along with even faster growth in remaining performance obligations, which is a strong indicator of future revenue. It also posted impressive growth in both operating profits and cash flows. Those are strong signals that its sales growth rate is sustainable, and that the company can efficiently translate those sales into earnings.
It's on pace to produce more than $2 billion in free cash flow over the next year, which is exactly what long-term investors want to see.
Palo Alto Networks also sports a wide economic moat, thanks to its scale, its intellectual property, and high customers' switching costs. That should give investors confidence in its ability to maintain its competitive position moving forward. Artificial intelligence (AI) is adding extra uncertainty to an already dynamic cybersecurity industry, and it's hard to predict the long-term outcomes from a market that's in flux.
Still, Palo Alto's significant market share is unlikely to dissipate by the next bull market, and the company is investing heavily to enhance its product portfolio with new technology. It's likely to be one of the most popular stocks in an industry that should attract lots of investor attention down the road.
Palo Alto Networks' price-to-cash flow ratio is under 35, which is low enough to create upside potential if the company maintains its high growth rate and profitability. With a market capitalization closing in on $100 billion, the stock could be one of the bigger drivers of the next bull market.
Alphabet
Alphabet (GOOGL 10.22%) (GOOG 9.96%) isn't exactly flying under the radar, but it's become a clear second fiddle to its rival Microsoft in recent months. Microsoft has outperformed the Google parent company from the start of 2022 to the present, and the valuation gap between the two companies has widened significantly.
Alphabet is much cheaper to buy relative to free cash flow and forecast earnings, which are core measurements of performance for established businesses.
MSFT PE Ratio (Forward) data by YCharts
There's reasonable justification for the discount attached to Alphabet. The company has looked somewhat vulnerable in key battles with its competition. Microsoft has spent the past year impressing investors by investing in OpenAI and partnering with that company to bring impressive products to market, such as ChatGPT and DALL-E, while Google Bard was initially received as a flop.
Microsoft has also expanded its lead over Alphabet in cloud computing by taking market share away from leader Amazon. Alphabet also deals with serious competition for its Google Search and YouTube products from a variety of alternative search engines and social media platforms. AI is disrupting the tech world at an accelerating rate, and it could be trouble for incumbent market leaders whose economic moats might not be as ironclad as we used to think.
However, the relative discount on Alphabet shares creates an opportunity for investors. Alphabet might have modestly lagged its key rivals in some ways in 2023, but it's still a powerhouse. The company has access to massive amounts of unique data, a stunning collection of talent in its organization, and a $45 billion annual research and development budget that should support its competitive position.
GOOG Research and Development Expense (TTM) data by YCharts
The concerns about competitive pressures are fair, but they're somewhat nitpicking when it comes to the next bull market. Alphabet is a diversified tech giant that's among the leaders in several key industries, including cloud computing, web search, AI software, video streaming, navigation, and mobile operating systems. It also has meaningful investments in potential high-growth industries, including health technology, autonomous vehicles, robotics, and telecommunications.
The company's economic moat remains intact for now thanks to its massive scale, network effects, and deep base of intellectual property. Its return on invested capital (ROIC) has been over 20% for multiple years in a row, offering quantitative proof of that moat.
Alphabet isn't going anywhere between now and the next bull market. It's growing faster than 10%, and that's likely to continue for the foreseeable future. With a forward price-to-earnings (P/E) ratio under 23, the stock is priced to charge higher in a surging bull market -- and with a $1.7 trillion market capitalization, Alphabet is big enough to help power the market itself.
