The last several months haven't been easy for most tech stock investors. The Nasdaq-100 Tech Sector Index is down by more than 15% from its recent highs, and many smaller tech companies have seen even more significant drawdowns.
But with volatility comes opportunity, and the recent sell-off has left several high-quality digital companies trading at attractive prices. Spotify Technologies (SPOT 2.77%), Wix.com (WIX -0.42%), and Match Group Inc. (MTCH -0.78%) are three businesses that fit that mold -- let's see why.
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Spotify
Spotify is the largest audio streaming company globally. Over the last 12 months, the company generated $11 billion in revenue from its more than 400 million total monthly active users. However, despite its large and growing revenue base, Spotify has long maintained a cheaper sales-based multiple relative to its digital peers. This is primarily attributable to Spotify's low gross profit margins.
With the majority of the content on Spotify's platform owned by artists and major music labels, Spotify has historically been required to pay out the lion's share of its revenue to those rights holders. But with Spotify's recent investments in alternative forms of audio -- most notably podcasts -- that's poised to change.
Podcasts generate revenue mainly through advertisements, and these have helped Spotify grow its ad-supported revenue to roughly $1.3 billion in 2021 -- a 62% increase versus the year prior. With podcast advertising unhindered by the royalty payouts to rights holders, Spotify should begin to take home a bigger slice of its revenue in the form of gross profits.
Although this is still a relatively small percentage of the overall business compared to the subscription side -- advertising accounted for 15% of overall revenue in the most recent quarter -- Spotify's CEO Daniel Ek clearly expressed his optimism for the segment during the company's third-quarter conference call when he stated that "at the very least, this should be 20% of our revenues. But it might possibly be a lot more than that 30%, 40% even over the next five to 10 years."
Wix.com
Wix is a drag-and-drop website building and hosting platform that allows anybody to create the internet presence they desire. Whether it's a photographer, fitness influencer, event planner, or anyone else, Wix's platform provides the tools to not only set up shop but also carry out the day-to-day tasks of operating a digital business.
With this approach of helping businesses of all types, Wix has grown to six million premium subscribers and rapidly increased its market share among content management systems, from just 0.6% in 2017 to 3.2% today. Between its subscriptions and its revenue from additional products known as "business solutions," Wix generated roughly $1.3 billion in total revenue in 2021, which was 29% more than the year prior.
Yet despite the company's strong growth in revenue, Wix has been making significant investments in bolstering its business solutions offering, which has diminished the company's profitability of late and left many investors concerned. However, last quarter, Wix's Chief Financial Officer Lior Shemesh put some of the worries to rest when he stated that he expects the company's free cash flow margin to surpass its previous high of 17% over the long term.
Given Wix's current market cap to revenue ratio of just over four times, a return to that level of profitability combined with some continuation of Wix's steady track record of growth should make this a rewarding stock to own over the coming years.
Match Group
Match Group is an online dating conglomerate home to dozens of different brands. Led by its flagship app Tinder, Match Group owns several leading matchmaking services in what's proven to be a durable and booming industry. In fact, while the figure is likely even higher today, from 2007 to 2017 the percentage of heterosexual couples in the U.S. who met online more than doubled, from roughly 20% to 40%.
This shift has certainly benefited Match Group, as its number of paying users has jumped from roughly 5.7 million to 16.2 million over the last five years. But while Tinder is no doubt leading the charge for Match Group, it isn't the only brand investors should be excited about.
Hinge, which caters to users who are more serious in intent, grew its 2021 revenue by 118% to reach $197 million. Though that's still only about 12% of Tinder's revenue, Hinge is seeing promising growth in its users' willingness to pay and is just now beginning its international expansion.
Additionally, one perk of the online dating industry, in general, is that dating apps have a tendency to show enduring growth as they reach greater size thanks to their network effect. Since each new user enhances the value of an app for the next potential user, Match Group is able to sustain strong growth while also spending less on new user acquisition. This should lead to increased profitability as Match Group's emerging apps continue to scale.
But while Match Group delivered strong growth across the board in 2021, its stock hasn't been immune to the overall tech sell-off. With Match Group's stock now down more than 40% from its recent highs, the company's valuation has become much more attractive.
Shares of Match Group currently trade at an enterprise value (market cap minus net cash) to trailing-12-month free cash flow ratio of 39 times. While that multiple might strike investors as screamingly cheap, it seems like a fair price to pay for a business that should sustainably grow its revenue over the next decade while also increasing profitability.
