If you were investing six months ago, the words "cheap" and "technology stocks" were not often found in the same sentence when talking about the markets. Many fast-growing technology companies were supporting nosebleed valuations, driving the average price-to-sales ratio (P/S) of the broad market to record highs.
But over the past few months, the conversations have turned and those two terms are rarely seen apart, with many of these recent highfliers trading down 50% or more from all-time highs. This situation creates a wonderful hunting ground for growth investors looking for places to put their available cash to work.
If you are looking for suggestions on where to begin your search, here are two cheap technology stocks to consider buying right now.
Image source: Getty Images.
1. Wix.com
Wix.com (WIX -0.42%) is one of the leading website builders worldwide. Based in Israel, the company has a 2.9% market share in the website building industry worldwide, which is behind only Shopify and WordPress. This market share has grown steadily over the past few years, up from only 0.6% five years ago.
The company makes money in a few different ways. The business where it generates the majority of its revenue and gross profit is creative subscriptions, which are when individuals/businesses pay for access to a custom URL and Wix's do-it-yourself website building platform. It also allows creative agencies and professional website builders to go deeper with web design through its new Editor X product, which has more advanced design features. In 2021, creative subscriptions revenue grew 21% year over year to $950.3 million with a 76% gross margin. Even though Wix is operating at around break-even right now, management says this segment is doing 20%-plus free cash flow margin right now.
So where is all that money being spent? To build out Wix's business and e-commerce solutions. This mainly includes e-commerce website building and its payment product called Wix Payments, which is meant to compete with e-commerce leader Shopify. Its business solutions segment did $319.4 million in revenue in 2021, growing 59% year over year, but only had 20% gross margin. It is likely that this segment is very unprofitable on its own right now, which is fine as long as it keeps growing quickly and eventually starts generating cash as it scales.
As of this writing, Wix stock has a forward P/S of 2.7. If it can keep up its consolidated gross margin of 62%, that puts the company's forward price-to-gross-profit (P/GP) at 4.3, or lower than the market average. This is much too cheap for a company that has consistently grown its top line at a double-digit rate and has a clear path to increase its 2.9% market share in website building over the next decade.
WIX PS Ratio (Forward 1y) data by YCharts
2. Spotify Technology
Spotify Technology (SPOT 2.77%) is the largest digital music and audio platform globally outside of China. The company offers free access to music and podcasts that are supported with advertising, as well as a premium ad-free service that lets you download songs and listen offline.
At the end of the fourth quarter of 2021, Spotify had 406 million total monthly active users (MAUs) and 180 million paying premium subscribers around the world. Revenue in the quarter grew 24% year over year to $3 billion, with the majority coming from its premium business. While the ad-free service should continue growing at a steady pace, Spotify is seeing rapid growth from its advertising business, which grew 40% in Q4 and now makes up 15% of its revenue. This rapid growth is coming from the recent launch of the Spotify Audience Network (SPAN), a dynamic advertising marketplace for both music and podcasts. With 3.6 million podcasts on its platform and the number of MAUs listening to podcasts growing by double-digit percentages quarter over quarter, Spotify has a long runway to grow its non-music advertising business over the next few years and beyond.
With a market cap of $28 billion, Spotify trades at a forward P/S of 1.85. The company has a low gross margin right now, at 26.5% last quarter, due to the high royalty payments it makes to music rights-holders. However, with its rapidly growing podcast advertising business (which management said will eventually have a much higher margin at scale), Spotify should be able to grow its overall gross margin over time. If it can, and the top line continues to compound as more people around the world transition to digital audio streaming, Spotify stock should do well for investors over the next decade.
Investor takeaway
Long-term investors have had a rough last few months with Spotify and Wix stock, with both share prices down over 50% in the last year. In Wix's case, shares are down 75% as of this writing. With the decline in price in spite of continued business growth, now could be a perfect time to start or add to a long-term position in either of these companies.
