2022 has not been kind to investors. This is especially true for investors in high-growth technology stocks. As we come toward the end of March, the Nasdaq 100 Index is down over 10%. It could be headed much lower if the economy goes into a recession because of the Russia-Ukraine war and rising interest rates.
There is no reason to panic if you are a long-term investor, but if you're uncomfortable with seeing your portfolio go down 40% or more in such a short time (as many high growth investors are experiencing at the moment), now might be the time to reevaluate what stocks you want to buy. Specifically, it could be helpful to diversify and look at some value stocks that may be less volatile in a recessionary environment.
Dropbox (DBX -0.85%) and Nintendo (NTDOY -1.83%) are two value stocks to buy ahead of the next recession. Here's why.
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1. Dropbox: More than just file sharing
Dropbox was one of the top start-ups to come out of Silicon Valley in the 2010s. The company revolutionized cloud-based file sharing for individuals and businesses, inspiring the large technology platforms to start competitors like Alphabet's Google Drive, Microsoft One Drive, and Apple iCloud. When Dropbox went public in 2018, there was a bit of fanfare from the investing community, with the stock popping 35% the day of the IPO. But since then, Wall Street has pretty much left the stock for dead. As of this writing, Dropbox's share price is at $23.14, not all that much higher than its $21 IPO price.
What happened? Why has Dropbox's stock performance been so lackluster? It certainly hasn't been because of the business doing poorly. At the end of 2021, Dropbox had 16.8 million paying users, average revenue per user (ARPU) of $135, and $2.16 billion in annual revenue. Compare that to the end of 2018, when the company had 12.7 million paying users, an ARPU of $119.60, and $1.39 billion in annual revenue. And most importantly, Dropbox has started producing healthy free cash flow (FCF), generating $707 million in 2021 vs. only $362 million in 2018.
By 2024, Dropbox has a goal of generating $1 billion in FCF per year. It is going to do that by making its file-sharing and digital content hub more valuable to users and growing paying users at its fast-growing subsidiaries HelloSign and DocSend, which are both getting bundled with Dropbox subscription tiers. At a market cap of $8.8 billion, Dropbox stock trades at a trailing price-to-free-cash-flow (P/FCF) of 12.4 and a P/FCF of 8.8 based on its 2024 guidance.
With the stability and durable growth of this business, healthy cash generation, and below-average P/FCF, Dropbox looks like a perfect value stock to own through a recession.
2. Nintendo: A video game and entertainment giant
Dropbox might be a relatively boring business to follow, but that is not the case with Nintendo. The Japanese company is one of the largest entertainment franchises in the world. It has been a leader in gaming hardware and software for the last few decades, producing some of the most popular franchises in the industry. These include top titles like Mario, Zelda, Animal Crossing, and many others. It also owns a large stake in the Pokémon Company, giving it exclusive rights to publish the games from the top entertainment franchise in the world on its gaming hardware.
Right now, Nintendo is selling one piece of gaming hardware called the Nintendo Switch, a hybrid console/mobile gaming system. Since its launch in 2017, the device has sold over 100 million units, making it the most popular dedicated gaming system over that time span. This large install base has led Nintendo to generate tons of software (game) sales, which is how it makes the majority of its profits. In fiscal year 2022, which ends this month, Nintendo is guiding for 220 million software unit sales, translating to $4.6 billion in operating profit.
As of this writing, Nintendo has a market cap of $62 billion. If you subtract its gigantic $13.3 billion cash pile, its enterprise value comes down to $48.7 billion. If it hits its current-year operating profit target, the stock will trade at a current enterprise-value-to-operating profit (EV/OP) of 10.5, or much below the market average. And this is before considering its stakes in the Pokémon Company and fast-growing augmented reality (AR) start-up Niantic.
One thing investors should watch out for with Nintendo is the cyclicality that can come whenever Nintendo launches its new console. Since it takes a few years for customers to buy the devices, Nintendo's overall revenue and profits can be somewhat lumpy. But over the long-term, if you believe in the durability of video games and Nintendo's flagship franchises, this lumpiness is nothing to worry about. Investors shouldn't have any concerns about buying Nintendo stock, even if we head into a recession over the next year.
