2 One-time-in-a-generation buying opportunities in the 2022 bear market

Investing in developing stocks has been a painful experience for the past two years. Long before the broad market peaked at the end of 2021, many smaller software and technology stocks were battered and fell by as much as 50%, 70%, and in some cases more than 80% from all-time highs.

Although it is not a pleasant experience if you own these companies, significant dips can provide rare buying opportunities with stocks trading at huge discounts.

This is the reason for both Spotify Technology (spot -1.92%) And the Wix.com (WIX -1.66%) These are a once in a generation buyout opportunities right now.

Pioneering audio streaming

Spotify has hundreds of millions of users around the world (operating in every major market except China). The podcast service, which offers ad-free music subscriptions as well as access to millions of podcasts, has steadily grown in popularity over the past decade.

In the last quarter, there were 433 million monthly active users on Spotify and 188 million premium subscribers. That’s up from just 180 million MAU and 83 million premium subscribers in the same quarter of 2018.

Management believes that the service still has plenty of room for expansion as digital audio streaming grows around the world. By 2030, they want a billion or more people who use Spotify regularly, or more than double the number today. This may seem an ambitious goal, but if a few billion people use audio streaming services outside of China by 2030 and Spotify can retain its current 32% market share in streaming music, 1 billion MAU is out of the question.

With such a steady growth of users and subscribers, Spotify has been able to consistently increase its overall profits since it went public a few years ago. In the last quarter, it has fallen in dollar terms due to exchange rates and huge investments in podcasts. Foreign exchange developments are out of the company’s control, but the effects of podcasts on gross margin should begin to wane in 2023 once it starts expanding its podcast ad market worldwide.

Spotify has seen 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 created a fast-growing ad market that has helped accelerate the ad segment, with revenue growing 31% year over year in the past quarter. Next, management wants to create a new audiobook product within the Spotify app, with the service supposed to hit the market sometime this year.

Spotify is not profitable, which makes it impossible to value it with its price-earnings (P/E) ratio. But with the stock down nearly 60% in the past year, the stock appears to be trading at a huge discount. With a market capitalization of $19 billion, the delayed earnings per share from price to gross (P/GP) is 6.1, which is only slightly above the 5.45 average for Standard & Poor’s 500. With steady revenue growth (23% last quarter), significant market opportunity to follow, and new opportunities in podcasts and audiobooks, Spotify stock looks like an amazing buy at these levels.

SPOT Gross Profit (TTM). Data by YCharts. TTM = last 12 months.

The backbone of building a website at a discount

An Israeli company, Wix, offers a software platform for individuals and businesses looking to build a web presence. This includes building and designing websites, helping to find a URL, and e-commerce tools.

With its integrated model, steady growth of internet usage, and constant iteration of products, Wix has succeeded in increasing the number of paying subscribers significantly over the past decade. In 2010, she 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 translates into sales. Revenue for the last 12 months was $1.34 billion last quarter, nearly 10 times more than 2014, when the company generated $142 million in profit. Over the next three years, management expects revenue to accrue at an annual rate of between 21% and 23%.

So why are investors going down in stocks? Two reasons: First, revenue growth has slowed in the short term due to difficult comparisons with the pandemic period. Second, Wix has struggled to prove it can generate a steady profit, with free cash flow at negative $51 million over the past 12 months.

Management believes that the first problem will resolve itself as the website building industry approaches the pandemic period. The second problem is targeted through better cost management. For example, the company recently announced a plan to cut costs of $150 million and lay off 100 employees.

It will take some time to resolve these issues, but by 2025, Wix is ​​steering its business to generate $2.5 billion in revenue and $500 million in free cash flow. At a current market capitalization of $4.8 billion, that would give the stock a forward free cash flow (P/FCF) price of 9.6, which is cheap no matter how you split it. If you think Wix can hit the free cash flow goal, the stock looks like an easy buy at these prices.

Leave a Comment