Investing in growth stocks has been a painful experience over the past couple of years. Well before the broad market peaked at the end of 2021, many smaller software and tech stocks suffered a setback and fell as much as 50%, 70% and in some cases over 80% from their highs. historians.
While not a fun experience if you own these companies, large dips can provide rare buying opportunities with stocks trading at significant discounts.
Here’s why both of them Spotify technology (STAIN -1.14%) And Wix.com (WIX -1.17%) are once-in-a-lifetime buying opportunities right now.
Leader in audio streaming
Spotify has hundreds of millions of users around the world (operates in all major markets except China). The audio streaming service, which offers ad-free music subscriptions and access to millions of podcasts, has steadily grown in popularity over the past decade.
Last quarter, there were 433 million monthly active users (MAUs) through Spotify’s service and 188 million premium subscribers. This is up from just 180 million MAUs and 83 million premium subscribers in the same quarter of 2018.
Management believes the service still has plenty of room to expand as digital audio streaming grows around the world. By 2030, they want 1 billion or more people to use Spotify regularly, or more than double the current number. This might seem like an ambitious goal, but if by 2030 a few billion people are using audio streaming services outside of China and Spotify is able to maintain its current 32% market share in music streaming, 1 billion MAU. it’s not out of the question.
With this steady growth in users and subscribers, Spotify has been able to steadily increase its gross profit since it went public a few years ago. Last quarter, it fell in dollar terms due to exchange rates and heavy investment in podcasts. Foreign exchange developments are beyond the company’s control, but the impact of podcasts on gross margin is expected to begin to decline in 2023 once it begins expanding its podcast advertising market around the world.
Spotify has had a lot of success since it started investing in the podcast market a few years ago. It now has more podcast listeners than Apple Podcasts in the US and has built a fast-growing advertising market that helped accelerate its advertising segment, with revenue growing 31% year-over-year in the last quarter. Next, management wants to create a new audiobook product within the Spotify app, with a service expected to hit the market this year.
Spotify is not profitable, which makes it impossible to value with a price / earnings (P / E) ratio. But with the stock down about 60% over the past year, the shares appear to be trading at a big discount. With a market capitalization of $ 19 billion, the stock’s trailing price-to-gross profit (P / GP) is 6.1, which is only slightly above the 5.45 average for the stock. S&P 500. With steady revenue growth (23% last quarter), a huge market opportunity to pursue, and new opportunities in podcasts and audiobooks, Spotify stock looks like an incredible buy at these levels.
A backbone of website building at a discounted valuation
An Israeli company, Wix, offers a software platform for individuals and businesses wishing to create a web presence. This includes building and designing websites, assisting in finding a URL, and e-commerce tools.
With its integrated model, steady growth in internet usage, and continued product iteration, Wix has dramatically increased its paying subscribers over the past decade. In 2010 it had only 100,000 subscribers. At the end of 2021, there were 6 million people and companies paying for Wix products.
As you might expect, the growth in paying subscribers has translated into sales. Revenues for the past 12 months reached $ 1.34 billion last quarter, nearly 10 times more than in 2014, when the company achieved revenues of $ 142 million. Over the next three years, management expects revenue to increase at an annual rate of between 21% and 23%.
So why are investors so low on the stock? Two reasons: First, revenue growth slowed in the short term due to difficult comparisons with the period of the pandemic. Second, Wix has struggled to prove it can generate consistent profitability, with negative free cash flow of $ 51 million over the past 12 months.
Management thinks the former problem will resolve itself when the website construction industry ends the pandemic period. The second problem is addressed through better cost management. For example, the company recently announced a $ 150 million cost reduction plan and 100 employee layoffs.
It will take some time for these issues to be resolved, but by 2025 Wix is leading its business to generate $ 2.5 billion in revenue and $ 500 million in free cash flow. With a current market cap of $ 4.8 billion, that would give the stock a forward-to-free-cash-flow (P / FCF) price of 9.6, which is cheap no matter how you cut it. If you think Wix can hit its free cash flow goal, the stock looks like an easy buy at these prices.