Over the last year, many tech stocks have seen a meteoric rise as the pandemic accelerated the push toward digital solutions. While the underlying performance of some tech businesses warranted their strong gains in the market, many others are arguably overvalued.
Differentiating between the two can be tough, but there are three stocks in particular that are still poised for a bright future.
Image source: Getty Images.
1. Autodesk: Building the future
Autodesk (ADSK +1.31%) provides software and design tools to the Architecture, Engineering, and Construction (AEC) industry. Put simply, the company builds software that helps people make things. With more than five million users around the globe, many projects stem from one version or another of Autodesk's software.
In 2016, Autodesk began pivoting from a licensing model to a subscription model. Since that time, revenue has grown by only 51%, but its operating cash flow margin expanded from 16.5% to 37.9%. The shift to subscriptions has unlocked a far more profitable model for Autodesk as reselling is now done through seamless software upgrades and no longer requires as much capital or effort on the sales front.
Now that the pivot is essentially complete, management has shifted its focus toward the latter stages of the project lifecycle with its introduction of the Autodesk Construction Cloud. The construction industry is currently undergoing a major shift from manual to digital systems, and Autodesk intends to be a big part of that. By spending more than $3 billion acquiring various construction software providers in recent years, Autodesk has bolstered its offering to become one of the major industry leaders.
Though the valuation currently seems steep at a price to operating cash flow ratio of more than 40 times, Autodesk's software is incredibly sticky. Not only is it best-in-class, but because it's so detailed and comprehensive, it's difficult to replicate or replace. Additionally, for users to get accustomed to Autodesk's design software takes time, and switching away can be costly. For these reasons and more, Autodesk should remain a critical component of the AEC industry for years to come.
2. Match Group: Online dating is still hot
Over the last decade, couples meeting online has become increasingly less stigmatized all around the globe. In fact, in some markets like the U.S., the internet is now the most common way many couples meet. Online dating conglomerate Match Group (MTCH 1.29%) has been a major beneficiary of this trend, and it just wrapped up a great financial year despite in-person dating becoming more difficult during the pandemic.
| Fiscal Year | Revenue | YOY Growth | Free Cash Flow Margin | Average Subscribers |
|---|---|---|---|---|
| 2020 | $2.39 billion | 16.6% | 31.2% | 10.4 million |
| 2019 | $2.05 billion | 18.6% | 30.2% | 9.3 million |
Data source: Match Group financial filings.
Match Group is an acquirer and incubator of dozens of smaller dating apps that are able to better grow as a part of its large ecosystem. Some of the company's most popular apps include Tinder, Hinge, OkCupid, Match.com, and Pairs. While Tinder currently makes up 57% of overall revenue, Hinge is generating incredible growth as well with downloads up 63% in 2020.
Though online dating is already quite common in the U.S., Match Group still sees plenty of opportunity abroad. This was highlighted by its recent $1.7 billion acquisition of the leading South Korean social discovery company, HyperConnect.
While Match Group remains well-positioned for international growth, management still sees expanding monetization capabilities within its more mature markets. In the fourth quarter, for example, Match Group's average revenue per user across North America grew 7% year over year. Whether it's through increasing subscription prices or introducing new a la carte features like Superlikes, Match Group has plenty of levers it can pull to increase spending from customers.
3. Dropbox: Don't overlook file-sharing
File-sharing and content collaboration platform Dropbox (DBX +0.60%) has seen an underwhelming stock performance since its 2018 IPO. Many investors consider file-sharing to be a commodity product with little differentiation between competing services. With several well-capitalized competitors like Alphabet and Microsoft, investors have been understandably gun-shy.
But despite investor concerns, management has continued to execute. Full-year revenue grew 15% to $1.91 billion, and free cash flow margin climbed two percentage points to 25.6%. To piggyback on the strong year, management tightened its focus on capital allocation. By announcing an additional $1 billion share repurchase program, management helped spur investor confidence.
Additionally, Dropbox followed up the earnings announcement with its acquisition of DocSend, a secure file-sharing and analytics platform. Between DocSend and Dropbox's e-signature provider HelloSign, customers can develop, share, edit, and sign documents all within one ecosystem. With everything customers could need in one place, switching platforms becomes less likely.
While Dropbox might not see crazy growth in customer count going forward, it should continue to return more cash to shareholders through increasing free cash flow and share buybacks.
