The market will crash eventually. This isn't a prediction about when/if it will happen tomorrow, six months, or three years from now. But as we all know from last year, market drawdowns happen ever so often. For the S&P 500, which is the index that comprises 500 large companies in the United States, there have been 19 drawdowns of 20% or more since 1900. That means approximately every 6-7 years, the market falls 20% or more.
For individual investors, it isn't smart to focus on betting when the market will crash (which is next to impossible). But it is important to line up what stocks you want to buy once it eventually occurs. Match Group (MTCH 0.11%) and Autodesk (ADSK 0.58%) are two high-quality technology stocks to buy during a market crash. Here's why.
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Match Group
Match Group is an online dating conglomerate that has a near-monopoly in its market. The company owns apps like Tinder, Hinge, BLK, Chispa, and others, plus legacy online dating properties like Match.com and OkCupid. Its only true competition is Bumble, the women-first dating app; otherwise, no company of any real scale is competing with Match Group right now.
In its latest quarter, Match Group's revenue grew 25% year over year to $802 million. This is being driven by its top service, Tinder, which grew revenue 20% year over year to $434 million in the quarter, making up the majority of Match Group's overall revenue right now. The app had 10.4 million paying users in the quarter, which is the majority of Match Group's overall paying users (16.3 million). Tinder should be a durable grower over the next few years and beyond as the online dating category continues to mature around the world.
However, Match Group's fastest-growing business unit is what it calls Emerging Brands. This group is driven by Hinge, a relationship-focused dating app with a slightly older audience than Tinder that is actually above Bumble in the top-grossing charts on Google Play right now. For the full year, Match Group is expecting its Emerging Brands to grow revenue 100% year over year. The segment is at a much smaller revenue base than Tinder right now, but if this high growth continues, it could help accelerate Match Group's overall revenue growth three to five years from now.
Match Group is highly profitable, with a 28% operating margin last quarter. This is occurring even while Match Group reinvests for growth, builds out many more products and services, and pays out 20%-30% of revenue to the mobile app stores. In 2021, Match Group is expecting approximately $3 billion in revenue. With a market cap of $36 billion, that gives the stock a price-to-sales ratio (P/S) of 12, and a price-to-operating-income (P/OI) north of 40, assuming Match Group's current operating margin holds. If the broad market goes into a 20%+ drawdown, Match Group's stock will likely get pulled down with it, allowing investors to buy into this long-term grower at a more reasonable valuation.
Autodesk
Autodesk is a software company that sells to architecture, engineering, and construction (AEC) firms. Its core products are Revit and AutoCAD, two platforms that allow people to draw and analyze physical places in a software program. It also has plenty of other services like Fusion 360, which serves the mechanical and manufacturing industries, Autodesk Construction Cloud, which serves general contractors and construction workers at job sites, and Media & Entertainment solutions, which helps with 3D animation and modeling. On top of this, Autodesk is leveraging the troves and troves of data it generates for its customers by selling it through a 3rd-party platform called Autodesk Forge. The Forge platform offers other companies and individuals access to engineering data and tools through application programming interfaces (APIs), helping expand the use cases of Autodesk's various software programs.
Autodesk is a high-quality business because of the immense switching costs customers have with its systems. With programs like Revit and AutoCAD, many times college students have classes dedicated to learning these systems, depending on what degree they are getting. Once graduated, companies are only going to take people who know how to use, say, Revit for jobs at an architecture firm, due to the huge learning curve in mastering these complex programs. This makes it extremely hard for customers to leave Autodesk, even if a competitor comes up with an equivalent solution.
This stickiness gives Autodesk tons of pricing power along with durable subscription revenue from its customers. For fiscal year 2022, which ends in January, Autodesk is guiding for $4.8 billion in revenue and $1.46 billion in free cash flow at the high end of its guidance. With a market cap of $55 billion, that gives the stock a price-to-free-cash flow of 38. However, next year, Autodesk is expecting to generate around $2.4 billion in free cash flow, which would give the stock a P/FCF of 23 based on today's prices. This is still not cheap considering it is a forward multiple and the uncertainty around whether the company will actually be able to hit that number.
If Autodesk stock takes a significant tumble from here, bringing its valuation down with it, that will be an opportune time for investors to scoop up shares in one of the most durable subscription businesses in the world.
