2 Once in a Generation Buying Opportunities in the 2022 Bear Market

Investing in growth stocks has been a painful experience for the past two years. Long before the overall market peaked in late 2021, many smaller software and technology stocks took a beating, falling as much as 50%, 70%, and in some cases more than 80% from all-time highs. .

While not a fun experience if you own these companies, major declines can provide rare buying opportunities with stocks trading at significant discounts.

Here’s why both Spotify Technology (PLACE -1.61%) Y Wix.com (WIX -1.62%) they are unique buying opportunities at this time.

A leader in streaming audio

Spotify has hundreds of millions of users worldwide (it operates in all major markets except China). The streaming audio service, which offers ad-free music subscriptions as well as access to millions of podcasts, has grown steadily in popularity over the past decade.

Last quarter, there were 433 million monthly active users (MAUs) on the Spotify 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 a billion or more people to use Spotify regularly, or more than double the number today. This may seem like a lofty goal, but if a few billion people use streaming audio services outside of China by 2030 and Spotify can retain its current 32% market share in music streaming, a billion MAUs aren’t there. out of the question.

With this steady growth in users and subscribers, Spotify has been able to steadily increase its gross profit since going public a few years ago. Last quarter, it fell in dollar terms due to exchange rates and heavy investments in podcasts. Currency developments are out of the company’s control, but podcasts’ impacts on gross margin should start to taper off in 2023 once it begins to expand its podcast advertising market around the world.

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

Spotify is not profitable, so it is impossible to value it on a price-earnings (P/E) basis. But with the stock down about 60% in the past year, it looks like the stock is trading at a deep discount. With a market capitalization of $19 billion, the stock’s ending gross price-to-earnings (P/EP) ratio is 6.1, which is only slightly higher than the 5.45 average for the stock. S&P 500. With steady revenue growth (23% last quarter), a huge market opportunity to seize, and new opportunities in podcasts and audiobooks, Spotify stock looks like an incredible buy at these levels.

Gross Profit SPOT Chart (TTM)

SPOT gross profit (TTM). Data by YGraphics. TTM = last 12 months.

A Backbone of Website Building at a Discount Valuation

An Israeli company, Wix, offers a software platform for individuals and businesses looking to build a web presence. This includes website creation and design, help finding a URL, and e-commerce tools.

With its integrated model, steady growth in internet usage, and continual product iteration, Wix has substantially increased its paying subscribers over the past decade. In 2010, he only had 100,000 subscribers. By the end of 2021, there were 6 million people and businesses paying for Wix products.

Unsurprisingly, the growth in paying subscribers translated into sales. Trailing 12-month revenue reached $1.34 billion last quarter, nearly 10 times more than in 2014, when the company had $142 million in revenue. Over the next three years, management expects revenue to grow at an annual rate of 21% to 23%.

So why are investors so down on stocks? Two reasons: First, revenue growth slowed in the short term due to difficult comparisons with the pandemic period. Second, Wix had a hard time showing that it can generate consistent profitability, with negative $51 million in free cash flow over the last 12 months.

The management believes that the first issue will be resolved only as the website building industry gets through the pandemic period. The second problem is addressed through better cost management. For example, the company recently announced a $150 million cost-cutting plan and the layoff of 100 employees.

It will take a while to iron out these issues, but by 2025, Wix is ​​aiming for its business to generate $2.5 billion in revenue and $500 million in revenue. Free cash flow. in a stream market cap At $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 its free cash flow goal, the stock looks like an easy buy at these prices.

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