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2 Stocks I'm Buying During the Next Market Correction

By Brett Schafer – Sep 15, 2021 at 8:11AM

Key Points

  • The stock market sells off by 10% or more about every two years.
  • Match Group dominates online dating but trades at a high valuation.
  • Autodesk is a leader in engineering software but also trades at a high valuation.

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Both these companies have resilient business models and a long runway to grow.

It might not seem like it if you only started investing this year, but stock market corrections (defined as a drop of 10% or more) are quite common. Since 1950, 38 have occurred, meaning that a 10% fall in prices happens approximately once every 1.84 years. If you're an investor with a decades-long time horizon, this means you will get plenty of chances to buy stocks at a discount in the coming years. But corrections can happen quickly, so it is smart to prepare for stocks you want to buy when the market eventually turns south. 

Two stocks I'm ready to buy once the market corrects are Match Group (MTCH -5.01%) and Autodesk (ADSK 3.27%). Here's why.

A crystal ball.

Image source: Getty Images.

Match Group

Match Group is the leader in online and mobile dating, owning dozens of different dating apps and websites. These include Tinder, Match.com. Hinge, OKCupid, and many others. Its most important asset right now is Tinder, which is the top dating app in the world by dollars spent.

The app did $399 million in revenue last quarter, growing 26% year over year. Match Group did $708 million in total revenue in the period, making Tinder the majority of its business right now, even though management says the app is seeing headwinds in international regions that were hit hard by COVID-19 in late spring and early summer.

Tinder will likely continue to be a great asset for Match Group, but its emerging brands are growing a lot quicker. These apps, which include Hinge, Chispa, BLK, and others, grew revenue 71% year over year to $103 million in the second quarter, greatly outpacing the growth of its flagship app. Hinge, BLK, and Chispa are the Nos. 1, 4, and 6 top-grossing apps, respectively, on Google Play's dating category at the moment (Tinder is somehow in a different category), which indicates that the growth of these apps is continuing into the third and fourth quarters.

Match Group also has phenomenal unit economics. In the second quarter, operating margin was 30% even though it is reinvesting for growth, folding in a $1.8 billion acquisition of Hyperconnect (a South Korean developer of social discovery and live streaming apps), and paying 20% to 30% of all its sales back to the mobile app stores. This indicates that at scale, Match Group's profit margins could be much higher than they are today.

The problem with Match Group stock is that it is trading at an expensive valuation. Its ratio of price to operating cash flow is 51, which is much higher than the market average. Should there be a significant decline in Match Group's stock, it will provide an opportunity for investors to get a piece of this high-quality business at a more reasonable price.

Autodesk

Similar to Match Group, Autodesk is a business with extremely high margins. It makes software for the design and engineering industry, with a focus on architecture, construction, and mechanical design. Its two most popular products are AutoCAD and Revit. AutoCAD is a decades-old program for 2D design, and Revit is 3D design software that uses building information modeling (BIM), which is the digital representation of 3D spaces that is gaining share in the architecture/construction industry year after year.

Autodesk has many other products, but these two are the main reasons the company is guiding for close to $5 billion in billings this fiscal year and $1.57 billion in free cash flow.

The company has also recently gone through a transition to subscription-based selling, which means its customers have to pay a flat fee every year to access its software instead of an up-front sum. This has made Autodesk's business a lot more consistent as well as profitable. Next year, when it finally will have matured this subscription business model, management is guiding for annual free cash flow to be $2.4 billion.

While Revit and AutoCAD are both great businesses, Autodesk has many other growth segments that investors should be excited about. These include construction management software in the Autodesk Construction Cloud, digital twin technology through Autodesk Tandem (digital management of a building), and a cloud-based mechanical/electrical/manufacturing platform called Fusion 360.

Like Match Group, Autodesk trades at a high valuation, with a market cap of $60 billion. Based on its guidance for $2.4 billion in free cash flow next year, the stock trades at a forward price to free cash flow of 25, which is expensive-looking on a two-year horizon. This makes Autodesk a perfect candidate to buy if/when the market goes into a sharp correction in the next few years. 

Brett Schafer owns shares of Autodesk and Match Group. The Motley Fool owns shares of and recommends Autodesk and Match Group. The Motley Fool has a disclosure policy.

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