Tech investors enjoyed monster gains in 2020 and 2021, even at the height of a once-a-century pandemic. America’s most innovative companies have helped humanity through this difficult time and have been justly rewarded. But the stock market is giving back some of those gains in 2022 as the economic environment shifts to one characterized by higher inflation and rising interest rates.
Consequently, the Nasdaq-100 The technology index is in a bear market with a loss of 24% since the beginning of the year. But history is proof that a bear market can be the best time to invest, as a rally to new highs usually follows, generally speaking, given enough time.
The key is to focus on quality stocks. Apple (AAPL -1.36%) and Microsoft (MSFT -1.67%) are already the two largest listed companies in the United States, with market valuations of $2.5 trillion and $1.9 trillion, respectively, but they could also be among the best performers in the future. Here’s why.
The case of Apple
In volatile stock market conditions, turning to some of the world’s top investors for advice is one way to navigate uncertainty. Warren Buffett is at the top of most people’s list of investment geniuses, and at the time of this writing, Apple stock is 42% of his Berkshire Hathaway portfolio of the investment company (in value).
Apple is a remarkable culture-changing organization. He’s transformed his iPhone smartphone from a luxury item into a must-have for many consumers, and he’s complemented it with a range of best-selling accessories like the Apple Watch and AirPods wireless headphones – all of which generate two billions of dollars in sales each year. But the company has also built a lucrative ecosystem of services that seamlessly integrate with its devices, and that might be the most exciting part for investors.
Apple hosts Apple News, Apple Music, Apple TV+ and Apple Pay, which were recently expanded to include Apple Pay Later. While services accounted for just 23.6% of the company’s total revenue of $82.9 billion in the recent third quarter of fiscal 2022 (ended June 25), the advantage is that they hold a much higher gross profit margin of 71%, compared to 52% for its hardware business.
Additionally, services revenue fueled business growth in the quarter, increasing 12% year-on-year, while hardware revenue was flat – although it will likely recover after September. once Apple unveils the next-generation iPhone.
Even as consumers tighten their belts amid an economic downturn, they’re still willing to spend a portion of their income on Apple’s products and ecosystem. This is one reason why investors have been relatively hesitant to sell Apple stock this year; it is down about 10% in 2022, which is less than half the loss of the Nasdaq-100 index. Another reason is the huge amount of money the company returns to shareholders.
In addition to its 0.6% annual dividend yield, Apple has repurchased more than $64 billion of its own stock so far in fiscal 2022, and recently increased the total program by $90 billion. of dollars. He ticks just about all the boxes for an investment veteran like Buffett, especially in this tough market.
The case of Microsoft
Microsoft and Apple were fierce rivals in the 1980s and 1990s. It’s rare for both sides in a brutal corporate war to come out on top, but decades later they’re the two biggest companies in the world. Their businesses have moved in slightly different directions more recently, but they still compete in certain areas like hardware, which could become a battleground as new technologies like virtual reality gain popularity.
Microsoft operates three main business segments, the largest of which is intelligent cloud computing. It’s powered by Azure, a cloud services platform designed to help businesses move their operations online through hundreds of solutions like data storage and even machine learning applications. It’s an area that Apple doesn’t even operate in, showing how much the tech landscape has changed over the past few decades.
Azure grew by a whopping 45% in fiscal year 2022 (ending June 30). It has overtaken the intelligent cloud business unit overall, which grew by less than 25%, but its large size is becoming a troublesome factor with $75 billion in revenue. As this number climbs, it will be more difficult to sustain rapid growth rates. But it’s worth noting that the cloud computing opportunity could be worth $1.5 trillion every year by 2030, according to an estimate by Grand View Research, and Azure is already the second-largest player in the industry.
Microsoft is also expanding its presence in gaming, building on its flagship Xbox platform to provide new services like Xbox Cloud Gaming, which lets users access their favorite console titles online and eliminates the need for download updates and patches. The cloud gaming industry is still in its infancy with an estimated value of $3.2 billion this year, but it could explode over 43% per year through 2029 to become a 40.8% annual opportunity. billions of dollars.
Microsoft has positioned itself for long-term prosperity by establishing a presence in the industries of the future, and owning its stock allows investors to own a cross-section of the growing digital economy.
Antoine Di Pizio has no position in the stocks mentioned. The Motley Fool holds and recommends Apple, Berkshire Hathaway (B shares) and Microsoft. The Motley Fool recommends the following options: $200 long calls in January 2023 on Berkshire Hathaway (B shares), long $120 calls in March 2023 on Apple, short $200 calls in January 2023 on Berkshire Hathaway (B shares) , short calls of $265 in January 2023 on Berkshire Hathaway (B shares) and short calls of $130 in March 2023 on Apple. The Motley Fool has a disclosure policy.