As we begin the new year, you are likely thinking about what stocks to buy in 2022. With thousands of choices, there can be a lot of noise when making decisions for your portfolio. One great way to start is by finding large, fast-growing industries, and buying some of the leaders in those spaces. If you can be patient and hold these stocks with a decade-plus time horizon, these businesses many times can put up great returns for shareholders.
Spotify Technology (SPOT 11.41%) and Electronic Arts (EA 0.02%) are two stocks with these characteristics that you should consider investing $50,000 in right now. Here's why.
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Spotify
Spotify is the worldwide leader in music streaming, pioneering the on-demand technology a little over a decade ago. The company, which operates in 180-plus countries (not including China), has 172 million paying subscribers to its ad-free streaming service and an estimated 32% market share around the world. It also has 220 million ad-supported monthly active users.
The number of premium subscribers and ad-supported users both grew 19% year over year last quarter. This led to premium revenue growing 22% year over year to approximately $2.5 billion, which is slightly faster than its premium subscriber growth. With revenue for the music streaming industry projected to have an 8.1% compound annual growth rate (CAGR) through 2026, Spotify's premium revenue should grow at close to 10% per year if it can maintain its current market share.
Music streaming is a solid business, but Spotify has goals to expand into a global audio platform. Its first big foray in this direction has been into podcasts. The company has bought up multiple podcast studios, licensed top shows exclusively to its platform, and acquired two podcast distribution platforms in Megaphone and Anchor.
All these moves have been targeted to help accelerate the growth of Spotify's new podcast advertising marketplace, called the Spotify Audience Network (SPAN), which automatically connects advertisers to shows while taking a slice of each ad dollar spent. The launch of this service in the spring of last year has helped accelerate advertising revenue, which grew 75% year over year last quarter to $366 million.
Right now, Spotify trades at a market cap of $43 billion with a trailing price-to-sales ratio of 4. Given the company's potential to grow its music streaming and advertising business over the next five years, right now looks like a great time to take a position in the stock.
Electronic Arts
Electronic Arts is one of the largest gaming publishers in the world, selling games and interactive services for popular franchises like FIFA Soccer, Madden NFL, The Sims, Battlefield, Apex Legends, and more. The company brings in the majority of its revenue through sales of the console versions of its games, but it also sells games on PC and mobile.
EA will be able to grow its revenue and profits over the next decade by riding the tailwind of the overall video game market. The industry was estimated to bring in $156 billion in revenue in 2019 and is projected to have close to a 15% CAGR through 2026. With so much annual spending from customers, EA should be able to grow along with the overall market as long as it continues to put out quality games.
This fiscal year, which ends in March, EA is expecting to generate $7.6 billion in net bookings (the revenue equivalent for video game companies) and $1.95 billion in operating cash flow. If it hits the bookings number, that will be 23% growth from fiscal year 2021, an impressive feat for a company of this size.
The operating cash flow would only be slightly higher than what EA generated in fiscal year 2021, but that is mainly because of the one-time expenses associated with the acquisitions of Glu Mobile, Codemasters, Playdemic, and Metalhead Software, which all closed in 2021.
Right now, EA has a market cap of $36.5 billion, and a price-to-operating-cash-flow ratio (a metric similar to the price-to-free-cash-flow ratio but it does not deduct capital expenditures) of 18.7 based on its fiscal year 2022 estimates. A value under 20 is generally considered good. With a sustained market tailwind and a reasonable valuation, EA stock is poised to put up solid returns for shareholders over the next five years and beyond.
