The Nasdaq-100 is an index monitoring some of the largest technology companies in the world. So far in 2022, the index is down over 32% with some of the index's top holdings, like Meta Platforms and Netflix, trading down more than 50%. This index, which had a lofty price-to-earnings ratio of 35 a year ago, is now sporting a much more affordable P/E of 23. That's a huge swing in the valuations of these technology companies.
If you have $5,000 available that's not needed to pay bills, bolster an emergency fund, or reduce short-term debt, now could be a great time to buy some tech stocks as so many are trading at discounted prices. I'd consider putting that available cash toward two tech stocks currently trading at a discount -- Electronic Arts (EA +0.00%) and Wix.com (WIX +1.98%). Both are great buy-and-hold candidates and worthy of further investigation. Here's why.
1. Electronic Arts: Riding the gaming boom
You may know Electronic Arts (EA) as the publisher of the popular EA Sports games. These include FIFA Soccer, Madden NFL, and others. These offerings have virtual monopolies on sports simulation games. Annual game releases and the growth of in-game purchases make these sports franchises highly profitable, and they are the key factor in why EA's stock is up about 25,000% since it went public a few decades ago.
NASDAQ: EA
Key Data Points
EA has built or bought plenty of non-sports gaming franchises over the years, including The Sims, Apex Legends, and Battlefield. These operate in more competitive environments than the sports games, but they give EA plenty of diversification as it tries to grow its console, PC, and mobile revenue bases. For example, the hit game Apex Legends just launched a mobile title called Apex Legends Mobile which is getting tens of millions of downloads around the globe.
EA's business should continue to grow as it rides the tailwind of video game spending. Third-party estimates vary, but the general consensus is that the industry will grow at a double-digit rate annually, going from just over $200 billion in yearly spending to over $300 billion before the decade ends. For one of the largest game publishers in the world, this is a gold mine of revenue opportunities to go after.
This year, management is guiding for EA to generate $1.6 billion to $1.65 billion in operating cash flow, which is the best earnings metric for the business due to the strange revenue recognition that comes with video game businesses. With a market cap of $34 billion, that gives the stock a forward price-to-operating cash flow (P/OCF) ratio of approximately 20 (if it hits the high end of its guidance). Since the business has such a strong track record of growth, this looks like a great price to buy EA stock and hold for many years.
2. Wix.com: Steady high-margin subscription revenue
Wix is one of the largest vertically integrated website builders. It competes with companies like Shopify and Squarespace and the company continues to take market share in website development this decade thanks, in part, to its simplified model. In 2013 it was estimated that Wix had less than 0.1% share of the market in content management systems (the back end of website development). Today, that share is 3.4%.
These market-share gains helped Wix build up a sizable base of paying subscribers over the last decade, hitting 6 million at the end of 2021. In the second quarter, its creative subscription business hit $1.05 billion in annual recurring revenue (ARR) with an impressive gross margin of 74%.
NASDAQ: WIX
Key Data Points
Wix is not very profitable at the moment due to its heavy up-front investments in e-commerce, payments, and tools for website-building agencies. However, by 2025 management is guiding for $500 million in annual free cash flow, the best metric of profitability for a software business like Wix. Given the current market cap of $4.2 billion, it would be difficult for investors to lose money if Wix hits this target.
With a simplified model and plenty of different tools for its customers like e-commerce functionality and payment processing, Wix should continue gaining market share over the next five to 10 years, just as it has for the previous 10, and get close to its 2025 free cash flow goal. Between its dirt-cheap price and its high-margin subscription revenue, Wix has the makings of a great stock to own if you hold on for the long haul.
