Growth and technology stocks have fallen on hard times in 2022. The Invesco QQQ Trust (QQQ 0.26%) -- which tracks the Nasdaq-100 index -- is down 23.3% year to date, one of the worst starts to the year for technology stocks since the dotcom bust. There are numerous reasons for these price declines, including rising inflationary pressures, energy/commodity price volatility, continued supply chain issues, and Russia's invasion of Ukraine. Many investors are now worried the U.S. economy is headed for a recession this year.
But if you take the long view, these price drops can provide tremendous opportunities for your portfolio. Here are two bargain stocks ready to soar over the next three to five years.
Dropbox (DBX -0.81%) is well known as a cloud file-sharing and storage platform. Over the past five years, the company has expanded its services to become a comprehensive workplace collaboration hub. Some of these products include electronic signatures (through its HelloSign acquisition), security features, and document analytics.
These enhanced features, which have come both organically and through acquisitions, have driven more paying customers to Dropbox and allowed the company to raise prices. In the first quarter of 2017, Dropbox had 9.3 million paying customers and average revenue per paying customer of $110.79. Five years later, in Q1 2022, it had 17.1 million paying users and average revenue per paying user of $134.63.
This scaling of the business has helped Dropbox become much more profitable in the last few years. Since 2018, free cash flow per share (FCF/s) has more than doubled to $1.87, with $722 million in cash generated over the last 12 months.
Dropbox stock has been a terrible performer since its IPO, with the stock down 27.8% since 2018. However, with a market cap of $7.66 billion at the moment, shares trade at a trailing price-to-free cash flow (P/FCF) ratio of 10.6. For a company that has shown consistent growth and profits since going public, this P/FCF seems much too cheap, and it is why I think the stock could go much higher in the next few years.
Next up, we have entertainment giant Nintendo (NTDOY). Most of you will know the company for its immense success as a video game publisher and video game hardware manufacturer. Currently, it has the most popular gaming device in the world (based on overall sales), the Nintendo Switch, which launched in 2017. The company has sold approximately 108 million units worldwide, making it one of the most successful gaming consoles of all time.
These device sales, along with popular games from the Mario, Zelda, Animal Crossing, and Pokémon franchises, have propelled Nintendo's profits to new heights in the past few years. In its fiscal year that ended in March, Nintendo generated an operating profit of $4.6 billion. With a market cap of $50.7 billion, which comes down to an enterprise value of $35.9 billion when you subtract out its huge cash pile and minority investments, the stock trades at a dirt-cheap enterprise value-to-operating profit (EV/OP) of 7.8.
So why is Nintendo's stock so cheap? Because many investors don't believe its current earnings power is very durable. The company has gone through booms and busts in the past, and many are worried that once the Switch runs its course, earnings will be down significantly if the next gaming device is not as popular. While this is a real risk, Nintendo management is making explicit strategic decisions to ease the transition to its next console/gaming device.
The most important of these is making the device backward compatible (i.e. allowing first-generation Switch games to run on the system) and building out a huge user base of Nintendo accounts in the last decade. These decisions may seem simple, but if executed correctly they can help Nintendo maintain its player base (and therefore earnings potential) when it eventually graduates to its next console.
If you believe Nintendo's current earnings power is sustainable, the stock looks incredibly cheap right now. We may look back five years from now and be shocked you could buy Nintendo shares at less than 10 times its trailing earnings.