The software sector is going through a sharp drawdown in 2022. The First Trust Cloud Computing ETF, which tracks major software and cloud stocks, is down 38.4% year to date, one of the worst stretches in the index's history. These price declines are driven by investor fears over a coming recession, inflation, and rising interest rates from the Federal Reserve.
While scary, if you have the fortitude and time horizon to invest for 10 years or longer, this drawdown should provide some great buying opportunities. Here are two great software stocks to buy this year and hold for the long haul.
Image source: Getty Images.
1. Wix.com
First up, we have Wix.com (WIX -0.42%). Wix is a leading website builder for individuals and small businesses, charging recurring subscriptions to access URLs, customization tools, and back-office management. Like Shopify, it also offers tools enabling its customers to sell products online and collect payments for services.
Unlike traditional website building, which takes lots of software development, Wix provides out-of-the-box solutions to customers, allowing them to build quality websites without coding expertise. These website builders, called software-as-a-service (SaaS) CMS platforms, have rapidly gained market share in the last decade, going from 18% in 2011 to 37% in 2021. With Wix being one of the leading SaaS CMS platforms, one-in-four new CMS websites are now built using the service.
This secular tailwind has led to strong customer and financial growth for Wix. The company boasted 6 million paying subscribers as of the end of 2021, up from less than 1 million in 2013. Over the past 10 years, revenue is up over 2,000%, thanks to this growth in paying subscribers and price increases. While the company has not generated consistent cash flow, it has great gross margins, at 61% in Q1. This number should expand over time as the company scales its e-commerce and payments business, which is still in the early stages.
In 2022, management expects Wix's free-cash-flow margin to be between 2% and 5%. By 2025, it hopes to expand margins to around 20% while generating $2.5 billion in revenue. For reference, the business generated $1.3 billion in revenue in the past 12 months. At these projected 2025 levels, Wix will be generating $500 million of annual free cash flow a year. The current market cap of $3.16 billion gives the stock a forward price-to-free cash flow (P/FCF) of 6.3, which is way below the market average. If the company can hit these projections, the stock will likely be much higher five years from now.
2. Olo
Second on our list is the restaurant SaaS platform Olo (OLO -1.43%). The company went public in early 2021 but has seen its stock tank alongside a lot of new software companies. Shares are down 73.6% since going public. Olo's software products let quick-service restaurants (QSRs) easily manage service, take orders, and interact with customers from all the different digital ordering platforms. Its core products include ordering, delivery, and payments.
Large companies like Denny's, P.F. Chang's, and Wingstop pay for Olo's services because they increase efficiency for employees and help improve the customer experience -- from taking orders to receiving food. With 600-plus brands, 82,000 restaurants, and 2 million orders per day flowing through its platform, Olo is now a sizable business. It is projecting 2022 revenue to reach $195 million-$197 million, and while operating margins are only close to breakeven, the company has strong gross margins of 70%.
Locations under management have grown at a 31% compound annual growth rate (CAGR) from 2018 to 2021, and average revenue per unit has grown at a 29% CAGR over that same time frame. If these trends continue over the next few years, Olo's consolidated revenue should continue growing at a nice pace. Eventually, with strong gross margins and a recurring customer base, this should translate to strong profit and cash flow margins. At a market cap under $1.5 billion, now seems like a great time to start a position in Olo stock and hold for the long haul.
