Finding a good growth stock is key for investors who are looking to plump up their portfolios. Dividends can be helpful, of course, but there's no substitute for a high-flying growth stock. Here is a close look at two of the top tech stocks: Apple (NASDAQ: AAPL) and Microsoft (NASDAQ: MSFT). While there's no denying that both are great long-term investments, the edge in terms of growth has to go to Microsoft.
Slowing growth could challenge Apple's future
Apple used to be the hot growth stock on the NASDAQ. However, since the death of Steve Jobs, the company has been on a different trajectory. While it has still been upgrading its products and adding value for consumers, it's not the leader as far as developing new and exciting products anymore. It's become a solid value stock and an option for dividend investors looking for some recurring income, but as far as a growth stock goes, there's a lot to be desired from the company.
In its most recent earnings report, the company's sales rose by a modest 1.8% from a year ago. And while it did see growth in many segments, iPhone sales, the company's bread and butter, were down 9%. That's why it wouldn't be surprising if Apple were to unveil a cheaper iPhone next year in the hopes of jump-starting sales in 2020. The problem, however, is that at a lower price point, it'll take more volume to generate a significant amount of revenue and it'll also result in smaller profits as well.
In addition, the launch of Apple TV+ will definitely help add another avenue for growth. But in an increasingly competitive streaming video industry, it's not going to be easy for Apple to win over customers. It'll have to invest lots of money in developing the service with the quality content needed to wrest away significant market share, and that could take a lot of time.
Diverse offerings make Microsoft a safe bet
Microsoft is coming off a quarter that saw its sales rise by 14% year over year. And while its guidance may have been a bit underwhelming, the company saw strong growth across many major segments. Gaming, down by 7%, was the lone disappointment. But with four key segments seeing 25% growth from the previous year, Microsoft already has all the tools it needs to drive its sales even higher.
Azure, in particular, has been key to a lot of the company's impressive growth over the past few years. The cloud computing business saw its sales grow by 59% in Q1 and it's part of the company's intelligent cloud segment which generated revenue of $10.8 billion during the period. The downside is that for Azure, its growth rate has actually fallen from 76% a year ago. However, it's still likely to be a key part of the company's long-term growth.
An additional area that could generate a lot of growth for the company is its recent move into smartphones -- again. While Microsoft phones didn't work out all that well the first time around, the company could put a real dent in handheld sales with the launch of its new folding phone. If it proves successful, it might not only create a new growth opportunity for the company but take market share away from Apple in the process. Microsoft is the one name that's been glaringly missing from the smartphone market, and its re-entrance into the industry could attract a lot of users, especially with better software now in place.
Why Microsoft is the better option for growth investors
Microsoft is certainly not the new kid on the block anymore, but neither is Apple. Both companies have to be a bit more creative in finding ways to grow, and Microsoft not only has the edge today with a higher growth rate, but it also looks to have more potential over the longer term.
With Azure leading the way, cloud service revenue rising by 30%, and Office 365 and commercial Windows products still growing at around 25% , Microsoft has a very strong base of products and services that it can continue to rely on to generate growth for the foreseeable future, with smartphones potentially providing the company with even more growth further down the road.
Apple has also focused more on services but it's facing a much bigger problem as iPhone sales are starting to slow down , and that could be a sign that more users are not replacing their devices, or worse -- moving away from Apple's products entirely. There are a lot more question marks surrounding Apple's growth potential than there are Microsoft's, and that's why the edge has to go to the Redmond-based company today.
10 stocks we like better than Microsoft
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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. David Jagielski has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple and Microsoft. The Motley Fool has the following options: short January 2020 $155 calls on Apple and long January 2020 $150 calls on Apple and recommends the following options: long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and long January 2021 $85 calls on Microsoft. The Motley Fool has a disclosure policy.
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