It's rare to find high-quality businesses trading at a discount, but it can happen for a number of reasons, especially if there is short-term uncertainty due to an unimpressive earnings report, bad company news, or a weakening stock market in general. When it does, investors should take advantage.
Two solid companies whose stocks have been beaten down lately are Spotify (SPOT -1.14%) and Activision Blizzard (ATVI -2.42%). Regarding Spotify, Wall Street is worried about a slowdown in subscriber growth, while Activision Blizzard is embroiled in a scandal around sexual harassment and discrimination that has led to several lawsuits and regulatory complaints.
Those issues have driven down their respective stock prices, but for investors with long-term time horizons, this is a good time to buy.
Spotify is the world's largest music and audio streamer. As many readers will know, it offers a monthly subscription for ad-free music listening and also has a free tier that is supported by advertisements. In the second quarter, premium subscribers grew 20% year over year to 165 million, which was in line with Spotify's expectations. But from Q1, total monthly active users (MAUs) only grew by 9 million to 365 million, which was below the company's forecast.
Since its free-tier MAUs serve as a funnel toward Spotify's premium subscriptions, investors are likely nervous that Spotify's paid user growth is on course to slow in the coming years. This has sent the stock down nearly 21% year to date, well underperforming the S&P 500 index, which is up by 19%. However, if you're a shareholder, there's nothing to fret about, even if that growth slows a bit for now. The music streaming industry, which Spotify continues to lead, is expected to grow roughly 10% a year this decade. This will provide a great tailwind that the company can ride in the coming years.
On top of this, Spotify is aggressively diversifying outside of music, with a big focus on podcasts and podcast advertising. It owns multiple podcast studios, licenses top shows like Call Her Daddy and Armchair Expert, and owns two popular distribution platforms -- Anchor and Megaphone. These investments helped Spotify grow its advertising revenue 110% year over year last quarter, with podcast revenue growing by 627%. This rapid advertising growth, combined with the durable growth of music streaming, makes Spotify a great long-term opportunity with the stock now trading at a price-to-sales ratio of 4.6.
2. Activision Blizzard
Activision Blizzard is one of the largest video game publishers in the world. It owns the Activision, Blizzard, and King brands, publishers of popular titles such as Call of Duty, Candy Crush, and World of Warcraft. Right now, the investing world is focused on the company's Blizzard segment, which is responding to sexual harassment and discrimination lawsuits, with allegations against numerous employees in the division. The potential fallout from this is likely why Activision Blizzard's stock price is down about 17.7% in 2021. There have also been tons of server issues with the launch of Diablo II: Resurrected in September, which could have been a reason the stock dropped as well. However, these issues were because the company got an unexpectedly large amount of traffic to its servers, which could be a good sign for the game's success over the long run.
While the alleged "frat house" atmosphere that the company fostered is disturbing, the core business is still doing fine.
In the second quarter, gamers played more hours of Call of Duty -- the company's biggest franchise -- than they did in the entirety of 2019. How did such major gains happen? Because of the blockbuster launches of Call of Duty Warzone (a free-to-play game) and Call of Duty Mobile. Both helped the franchise take a big step forward in the last year or so. For reference, consumer spending on Call of Duty Mobile is expected to hit $1 billion this year.
At the King studio, which is where the No. 1 mobile game Candy Crush is housed, revenue grew 15% year over year in Q2, with advertising revenue more than doubling.
Until this month, the Blizzard studio hadn't had any big launches this year. But it is expected to have a strong 2022 and 2023 with the Diablo franchise. Just-launched Diablo II: Resurrected updates the popular title from 20 years ago. It has a mobile game called Diablo: Immortal coming in 2022 and Diablo IV (a console/PC game) coming sometime soon as well. Like how Take-Two Interactive has expanded its Grand Theft Auto and Red Dead Redemption franchises, Blizzard is building Diablo IV to be more durable and long-lasting to hopefully sustain engagement and spending for many years.
Given that the company is poised to grow substantially in the coming years and the stock's trading at a price-to-operating-cash-flow ratio of 23, Activision Blizzard is a great buy right now.