Jhe last few months have not been easy for most tech stock investors. The Nasdaq-100 Tech Sector Index is down more than 15% from its recent highs, and many smaller tech companies have seen even bigger declines.
But with volatility comes opportunity, and the recent selloff has left several high-quality digital companies trading at attractive prices. SpotifyTechnologies (NYSE: SPOT), Wix.com (NASDAQ: WIX)and Match Group Inc. (NASDAQ:MTCH) are three companies that fit this mold – let’s see why.
Spotify is the largest audio streaming company in the world. Over the past 12 months, the company has generated $11 billion in revenue from its more than 400 million monthly active users. However, despite its large and growing revenue base, Spotify has long maintained a cheaper sales-based multiple compared to its digital peers. This is mainly due to Spotify’s low gross profit margins.
Since the majority of content on the Spotify platform is owned by artists and major music labels, Spotify has always been required to pay the lion’s share of its revenue to these rightsholders. But with Spotify’s recent investments in alternative forms of audio, notably podcasts, that’s about to change.
Podcasts generate revenue primarily through ads, and those helped Spotify grow its ad-supported revenue to around $1.3 billion in 2021, a 62% increase from the previous year. With podcast advertising unhindered by royalty payments to rightsholders, Spotify should start taking home a larger share of its revenue in the form of gross profits.
While still a relatively small percentage of overall business compared to the subscription side – advertising accounted for 15% of overall revenue in the last quarter – Spotify CEO Daniel Ek , made clear its optimism for the segment during the company’s third quarter. quarterback conference call when he said “it should be at least 20% of our revenue. But it could be way more than that 30%, 40% even in the next five to 10 years.”
Wix is a drag-and-drop website building and hosting platform that allows anyone to create any internet presence they want. Whether it’s a photographer, fitness influencer, event planner, or anyone else, Wix’s platform provides the tools not only to build a store, but also to perform the day-to-day tasks of running a digital business.
With this approach of helping businesses of all types, Wix grew to six million premium subscribers and quickly grew its market share among content management systems from just 0.6% in 2017 to 3. 2% today. Between its subscriptions and revenue from additional products called “enterprise solutions,” Wix generated approximately $1.3 billion in total revenue in 2021, up 29% from the previous year.
Yet despite the company’s strong revenue growth, Wix has made significant investments to bolster its enterprise solutions offering, which has recently diminished the company’s profitability and worried many investors. However, last quarter, Wix CFO Lior Shemesh allayed some concerns when he said he expects the company’s free cash flow margin to exceed its previous all-time high of 17. % on the long term.
Given Wix’s current market cap-to-earnings ratio of just over four times, a return to that level of profitability combined with some continuation of Wix’s steady growth track record should make it a rewarding stock to own over the coming months. coming years.
Match Group is an online dating conglomerate that is home to dozens of different brands. Led by its flagship app Tinder, Match Group has several leading matchmaking services in what has proven to be a sustainable and growing industry. In fact, while the figure is likely even higher today, from 2007 to 2017, the percentage of heterosexual couples in the United States who met online more than doubled, from around 20% to 40%. .
This shift has certainly benefited Match Group, as its number of paying users has grown from around 5.7 million to 16.2 million over the past five years. But while Tinder is undoubtedly leading the Match Group charge, it’s not the only brand investors should be excited about.
Hinge, which caters to users with more serious intentions, grew its revenue by 118% in 2021 to $197 million. Although this still only accounts for around 12% of Tinder’s revenue, Hinge is seeing promising growth in its users’ willingness to pay and is just beginning its international expansion.
Moreover, one of the advantages of the online dating industry, in general, is that dating apps tend to show sustainable growth as they reach greater size through their network effect. Because each new user improves the value of an application for the next potential user, Match Group is able to maintain strong growth while spending less on new user acquisition. This should lead to increased profitability as Match Group’s emerging applications continue to develop.
But while Match Group saw strong growth across the board in 2021, its stock hasn’t been immune to the overall tech selloff. With Match Group shares now down more than 40% from their recent highs, the company’s valuation has become much more attractive.
Match Group shares currently trade at enterprise value (market capitalization less net cash) over a trailing 12-month free cash flow ratio of 39 times. While this multiple may seem incredibly cheap to investors, it seems like a fair price to pay for a company that is expected to sustainably grow revenue over the next decade while increasing profitability.
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Ryan Henderson owns Match Group and Wix.com. The Motley Fool owns and recommends Match Group and Wix.com. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.