If you're just beginning your investing journey, a good place to start is with leading companies in their respective industries. The technology sector is ripe with stocks that have put up fantastic returns for investors over the past few decades, making it a good hunting ground for finding more quality companies to add to your portfolio.
Two leading tech stocks that can help bolster your portfolio in 2022 and beyond are Spotify (SPOT -0.15%) and Wix.com (WIX 0.75%). Here's why.
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Spotify: The leader in audio streaming
Spotify's service is used by hundreds of millions of people around the globe. It offers ad-supported and ad-free music listening with a library of tens of millions of songs, all from a mobile application. At the end of the third quarter, the company had 381 million total monthly active users (MAUs) and 172 million paying subscribers. These figures gave Spotify an estimated 32% market share, which is No. 1 worldwide.
Right now, Spotify is known mainly for music streaming. This is an attractive business, albeit one with low gross margins (29.1% last quarter), that is growing subscribers at around 19% a year. However, Spotify has more ambitious plans to become a global audio platform, expanding well beyond just the music industry. The biggest part of this plan is podcasts, which Spotify has invested heavily in over the last three to four years. This includes buying up studios like The Ringer, licensing top shows like the Joe Rogan Experience and Call Her Daddy, and buying two top distribution platforms in Megaphone and Anchor.
To make money off of these investments, Spotify has built a dynamic advertising marketplace similar to that of YouTube, which is owned by Alphabet's Google. It works like this. Podcasts owned by Spotify or distributed through Anchor or Megaphone can submit advertising slots to the Spotify Audience Network (SPAN). On the other end, advertisers send in advertisement clips, which SPAN then connects with these ad slots, taking a cut of the payment in the process. This opens up liquidity across the podcast advertising world, allowing even small shows to slowly start monetizing their work.
Spotify has an attractive financial growth profile. Music streaming should continue to grow at a double-digit rate as the service expands to almost every country worldwide, and podcast advertising should help accelerate the company's advertising business. Last quarter, advertising revenue grew 75% year over year to $365 million, with a lot of this growth driven by podcasts. With SPAN still less than a year old, and podcast listenership growing at an estimated 15% year-over-year rate worldwide, Spotify has a chance to continue growing advertising revenue at a high double-digit rate over the next five years. This can help Spotify grow its overall revenue from just over $10 billion (which is where it is now) to tens of billions of dollars a year eventually, which would be great news for shareholders.
Wix.com: Easy-to-use website builder
Wix is one of the world's leading website building companies. Third parties estimate its market share worldwide to only be 2.9%, which at first glance might make you think the company is not a leader in this industry. However, it is actually third in market share worldwide, behind WordPress (which has a dominant lead at 65% market share) and Shopify (SHOP 0.36%) (6.6% market share). The company is gaining ground fast, though, growing from only 0.6% market share in 2017 to the 2.9% it has today.
The company's main business is website-building subscriptions. This segment hit $992 million in annual recurring revenue (ARR) last quarter and enjoys high gross margins of 76%. On top of pure website development, Wix is expanding its business with three different strategies: e-commerce, payments, and specific vertical offerings.
Its e-commerce offerings are similar to Shopify's, where individuals/businesses with a Wix website can start selling goods to visitors. The payments segment is mainly through Wix Payments. Wix makes money on these transactions by taking a cut of every transaction, typically around 2%. Management expects gross payment volume (GPV, or the dollar amount processed by Wix Payments) to hit $10 billion in 2021. Specific vertical offerings are for different business niches. These include offerings like Wix Fit, which helps fitness trainers, studios, and gyms easily manage their businesses.
Like Spotify, Wix stock has an attractive valuation relative to its growth profile. With a market cap of only $9 billion and trailing-12-month gross profit of $760 million growing 18% year over year, Wix trades at a significant discount to competitors like Shopify. If Wix can continue gaining market share around the world while growing its new services like e-commerce and payments, this gross profit number will likely be much higher five to 10 years from now. This makes Wix an attractive tech stock to buy in 2022 and beyond.
