We learned in 2022 that some parts (maybe all?) of the cryptocurrency industry are built as a house of cards. When the foundations were found to be flimsy, the collapse didn't take long and several hedge funds lost big and were eventually forced to file for bankruptcy protection. In one case, it's estimated that at least $10 billion was stolen by FTX Trading executives from the company's customers in what could turn out to be one of the largest economic frauds in history.
When the dust from the collapse settles, customers who deposited their savings on the FTX platform will likely never get that money back. In some cases, it could have been wealth they built up for years and planned to use in retirement. It's a mess.
My take on the whole situation is that the crypto markets are un-investable. People looking to save up in retirement would clearly be better off investing their funds in common stocks. Those looking to avoid the stress and perils of the cryptocurrency market should really consider a closer look at these three technology stocks instead.
1. Alphabet: an internet monopoly
Alphabet (GOOG 0.66%) (GOOGL 0.67%) is the technology conglomerate that owns Google, YouTube, Google Cloud, and many other internet-focused services. Since its start in the late 1990s, Alphabet has grown into a tech giant by riding the tailwind of internet adoption around the world, dominating the search engine market in the process. Right now, Google Search has an estimated 90% market share worldwide with over 4 billion regular users. Alphabet's search revenue now totals close to $40 billion in quarterly revenue, putting it in line to hit $200 billion in annual revenue just from this segment of its operations within a few years' time.
NASDAQ: GOOG
Key Data Points
But Alphabet is not just Google Search anymore. YouTube, the most popular video service in the world, generates roughly $7 billion in quarterly revenue and has grown at an impressive rate over the past few years. As the most popular internet-connected TV (CTV) app in the United States, the do-it-yourself video platform is in pole position to capture the tens of billions in TV advertising dollars that will likely move from traditional cable to streaming video this decade.
Then there's Google Cloud, the third-largest cloud provider worldwide, tapping into a huge opportunity as this developing industry is expected to top $1.55 trillion in annual spending by 2030. Google Cloud is only 10% of Alphabet's overall revenue today, but will likely be much larger three to five years from now.
Right now, Alphabet has a market cap of approximately $1.3 trillion and generated $67 billion in net income over the last 12 months (as of the end of Q3). That gives the stock a trailing price-to-earnings ratio (P/E) of 19.4, which is actually below the market average. For a company with such strong growth prospects, Alphabet looks like an easy buy at these prices.
2. Dropbox: high switching costs
Many investors have forgotten about Dropbox (DBX +0.56%) since the start-up darling went through a hype cycle a decade ago. But the file-sharing company has slowly built up its business over the last few years and is now trading at a dirt-cheap valuation.
NASDAQ: DBX
Key Data Points
Last quarter the number of Dropbox paying users hit 17.6 million, up from 16.5 million last year and just 10.4 million in the third quarter of 2017. Many investors wrote off the business after Google and Microsoft released copycats of its products many years ago, even though it has consistently grown its paying user numbers. Why has it been able to beat these giant tech competitors? Two words: switching costs. File sharing and document storage services are a pain to switch, making it easy for Dropbox to retain its existing users even if someone like Google offers a competing product for free. It has also been able to upsell customers to things like digital signatures and document analytics through its acquisitions of Hello Sign and DocSend.
Over the last 12 months, Dropbox generated $736 million in free cash flow. In 2024, management has a goal of hitting $1 billion in free cash flow. With a market cap of just $8.5 billion, the stock could be trading at a price-to-free cash flow (P/FCF) of just 8.5 two years from now, which is significantly less than the market average.
Dropbox is not a sexy hypergrowth stock. However, with steady growth and a cheap earnings multiple, the company looks like a great one to own for the long term.
DBX Free Cash Flow data by YCharts
3. Spotify: A global audio platform
My last technology stock to buy is Spotify (SPOT 5.49%). The thesis for buying shares is simple: The company is expanding into the leading audio platform globally.
Over the last 10 years, Spotify grew by riding the tailwind of the music streaming market, hitting 195 million paying subscribers last quarter for its ad-free music service. Over the next 10 years, it should still see solid growth from music streaming (the industry is expected to grow at 10%+ for many years), but its ambitions are to expand aggressively outside of music and into all forms of audio. This includes podcasts, audiobooks, live shows, and more. Essentially, if it is published audio content on the internet, Spotify wants it on its platform.
NYSE: SPOT
Key Data Points
Spotify plans to monetize all this content through premium subscriptions, advertising, and a la carte purchases. While still in its infancy, Spotify management thinks this expansion -- along with the continued proliferation of the internet around the world -- could help the company reach $100 billion in annual revenue 10 years from now. Compared to trailing annual revenue of just over $10 billion, this will be a tall task, but it shows the huge potential that lies in front of Spotify if it can become one of the internet's leading platform companies.
With a market cap under $20 billion, investors are underestimating how big Spotify could be five to 10 years from now if it achieves its ambitious financial goals, which makes the stock a great buy at today's prices for investors planning to hold on for many years.
