Earnings season kicked off with a bang when Netflix (NFLX 1.74%) reported its first-quarter results this week. The company's report surprised to the downside, noting subscriber losses for the first time in a long while and offering guidance that the weakness would continue through the second quarter. The stock price dropped precipitously in the days following the release, and the stock is down about 38% in the last five days alone.
In conjunction with Netflix's drop, investors decided to sell other consumer internet companies, even if they don't compete in the video-streaming business. This has provided long-term investors the potential to buy some high-quality businesses at discounts. Here are two such stocks.
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1. Spotify
Spotify (SPOT 2.77%) is the leading audio-streaming application around the world. The company has 180 million premium subscribers to the ad-free version of the music service and 406 million total monthly active users (MAUs). These numbers have grown steadily since Spotify's debut on the public markets in early 2018. In the fourth quarter of 2017, MAUs totaled 160 million and premium subscribers were 71 million, meaning that Spotify has more than doubled both numbers in five years. Over the long term, management thinks it can reach over 1 billion MAUs.
The majority of Spotify's business right now is premium music streaming. In the fourth quarter of 2021, premium subscriptions grew revenue by 22% year over year to $2.5 billion, for a $10 billion annual run rate.
The premium business has a lot of growth ahead, but the highlight for Spotify right now is advertising, which grew 40% year over year in the fourth quarter to $427 million. Advertising is booming because of Spotify's huge embrace of podcasts and the launch of its dynamic advertising marketplace called the Spotify Audience Network (SPAN) where advertisers can easily advertise across music and podcasts.
Spotify is now the market leader in podcasts in many key countries around the world, and the industry is expected to grow at a double-digit rate this decade. So the advertising segment looks poised to increase revenue at a high rate for many years.
As of this writing, Spotify's stock is trading down 20% in the last five days on no company-specific news and now trades at an enterprise value of approximately $20 billion. In 2022, the average Wall Street analyst expects the business to generate $12.5 billion in revenue. Over the next few years, that number should go higher as the premium music and advertising businesses continue to grow.
If you believe Spotify can achieve 10%-plus profit margins as the business matures -- which seems reasonable given its gross margins of 25% that management thinks can climb higher -- the stock trades at a normalized forward enterprise-value-to-earnings ratio of 16, or right around the market average. Given Spotify's potential to keep growing revenue at a high rate for many years, that makes the stock a sweet deal at these prices.
2. Match Group
Match Group (MTCH -0.78%) is the world's leading online dating company. It owns services like Tinder, Hinge, and Match.com, where people of different ages and demographic groups can try to meet romantic partners. In the fourth quarter of 2021, Match had 16.2 million paying users across all its services, up 15% year over year.
The beautiful thing about Match Group is that it has consistently increased revenue at a high rate while also generating healthy profits. Since 2017, revenue has grown 22% a year, rising from $1.33 billion to just under $3 billion in 2021.
At the same time, its adjusted operating margin has never gone below 35%, and this is all while the company has had to pay out 25% to 30% of its revenue to the mobile app stores. Call me crazy, but that sounds like a business riding a secular tailwind with phenomenal unit economics.
Growth should continue over the next five years as well. Tinder, which generates more than 50% of Match's revenue, grew revenue 22% year over year and should see a catalyst with the winding down of the pandemic.
Hinge also has great promise for the company. The app is bringing in only $197 million in annual revenue, but it grew that figure by more than 100% in 2021 and more than 535% since 2019. Over the next few years, Hinge is going to focus on improving its monetization and expanding internationally (it is available only in English-speaking markets right now), which management hopes will keep revenue increasing at a high rate.
In the last five days, Match Group stock is down 19% and now trades at a market cap of $22 billion. With $852 million in operating income last year, that gives shares a price-to-operating-income ratio of 25.8. This isn't crazy cheap on a trailing basis, but with a business that has such a strong track record of growth, we might look back five years from now and think Match Group was a steal at these prices.
