KEY POINTS

  • Spotify’s flourishing ad business should aid profitability.
  • Wix continues to gain market share, owing to its simple interface.
  • The overall online dating trend is helping Match Group grow even more.

The last several months haven’t been straightforward for most technology stock investors. The Nasdaq-100 Tech Sector Index has dropped by more than 15%. Additionally, many lesser tech firms have suffered even more severe losses.

With volatility comes opportunity, and the recent downturn has presented several high-quality digital companies at reasonable valuations. Spotify Technologies (NASDAQ:SPOT), Wix.com (NASDAQ:WIX), and Match Group Inc. (NASDAQ:MTCH) are three firms that exemplify the concept; let’s look into why.

Spotify

Spotify is a multinational audio streaming service. The firm has generated $11 billion in revenue from its more than 400 million monthly active users in the last year. However, despite its significant and increasing income, Spotify has long had a lower sales-based multiple than its digital competitors. That is primarily due to Spotify’s low gross profit margins.

With the bulk of Spotify’s content owned by musicians and major music labels, it has long had to pay out a significant portion of its earnings to those rights holders. However, that is changing with Spotify’s recent alternative audio initiatives, particularly podcasts.

Advertisement revenue

Podcasts generate income primarily through advertisements.  These have aided Spotify in growing ad-supported revenue to more than $1.3 billion in 2021.  That’s a 62% increase versus the previous year. As a result, Spotify should start taking home a more significant share of its income in gross profits due to podcast advertising without royalty payouts to rights holders.

Although ads are still a minor component of the company’s overall sales compared to the subscription side, they accounted for 15% of total revenue in the most recent quarter. Spotify’s CEO Daniel Ek was clear about his enthusiasm for the area during the firm’s third-quarter conference call when he remarked that “at the very least, this should be 20% of our revenues. But it might possibly be a lot more than that 30%, 40% even over the next five to 10 years.”

Wix.com

Wix is a drag-and-drop website construction and hosting platform that allows anybody to create a desirable internet presence. In addition, Wix’s platform offers the tools necessary to set up shop and run a digital business daily.

Wix has expanded to six million premium subscribers and has rapidly increased market share among content management systems, from just 0.6 % in 2017 to 3.2% today, using this method of assisting businesses. Wix generated roughly $1.3 billion in total revenue in 2021, up 29% from the previous year, owing to its subscriptions and income from extra goods known as “business solutions.”

Concerned investors

Despite the firm’s strong revenue growth, Wix has been making significant investments in improving its business solutions portfolio. That has lowered its profitability in recent quarters and sparked worries among investors. Last quarter, however, Wix’s Chief Financial Officer Lior Shemesh quelled some of the fears when he predicted that free cash flow margin would surpass its previous high of 17% over the long term.

Wix’s current price-to-revenue ratio of around four times gives it an excellent value compared to its peers. With some continuation of Wix stock‘s consistent track record of growth and a return to that level of profitability, this stock should be rewarding to own over the following years.

Match Group

Match Group is an online dating company that includes several different brands. The firm, led by its flagship app, Tinder, has acquired several prominent matchmaking services, as evidenced by the industry’s longevity and growth. In fact, from 2007 to 2017, the proportion of heterosexual U.S. couples who met online increased from 20% to 40%.

Match Group has taken full advantage of the shift, with its number of paying customers increasing by roughly 15%. But while Tinder is undoubtedly pushing Match stock forward, it isn’t the only thing investors should be enthusiastic about.

Hinge, which caters to those who are more serious in their intentions, increased its 2021 revenue by 118% to $197 million. Hinge’s users are increasingly willing to pay and are only now beginning international expansion.

Network effect

In addition, one advantage of the internet dating business is that dating apps tend to show long-term development as they become more extensive due to their network effect. Each new user adds value to the app for the next potential user. Therefore, Match Group can sustain strong growth while spending less on new user acquisition. That should result in greater profitability for Match as its emerging apps continue to scale.

Match produced good performance across the board in 2021. However,  it has not been immune to the broader technology sell-off. With Match Group’s stock now down more than 40% from its previous highs, the company’s price/earnings ratio has dropped dramatically.

Match Group’s enterprise value (market cap minus net cash) to trailing-12-month free cash flow ratio is currently 39. While that ratio may appear insanely cheap, it seems to be a fair price for a business that should grow its revenue over the next decade while also improving profitability.

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