2 Tech stock you’ll regret not buying during this sale period

The past year or so has been rough for many tech investors. while the Standard & Poor’s 500 It’s actually up about 8.7% in the past 12 months, and there are many growth and high-tech investments that are trading down 30% or more. One example that exemplifies the situation is popularity ARK Innovation ETFwhich is down almost 51% from the same period last year.

Admittedly, these pullbacks are stressful, but if you have the capacity for volatility, it can also provide opportunities to buy shares in major companies when they are trading at a discount. Here are two stocks you’ll regret not buying during this ongoing market downturn.

Image source: Getty Images.

1. Spotify: down 53.8% from 52-week high

First, we have a music and audio streaming device spotify ( spot -0.08% ). The global platform boasts 406 million monthly active users (MAUs) and 180 million monthly premium subscribers to listen to ad-free, downloadable music. For whatever reason, business investors have been nervous lately, with the stock down 53.8% from its 52-week high in November 2021.

Despite the decline, the core business is doing well. Revenue grew 24% year-over-year in the fourth quarter to $2.9 billion, driven by new premium subscribers and Spotify’s renewed advertising business. Advertising revenue was $430 million in the fourth quarter, making up a small portion of Spotify’s consolidated revenue. However, it is growing very fast, at 40% year over year. why? As Spotify invests heavily in podcast content and podcast ads through the acquisition of major studios and exclusive licensing deals with top shows like Joe Rogan Experience And Call her father. To monetize this content, the company last year launched the Spotify Audience Network, a dynamic advertising platform similar to the alphabetYouTube (but for audio). With the overall podcast industry expected to grow by 30% through 2028 along with Spotify taking the number one market share position in several major markets, I am confident that the advertising business can grow at a high rate for many years.

In 2021, Spotify generated $11.4 billion in revenue and $3.1 billion in gross profit. Its profit margins are low at the moment, but over time, management expects the company to generate gross margins of 30%-40% (versus 25% now) and 10% surplus profit margins as it matures. With a current market capitalization of $27.7 billion, this gives Spotify stock a price-to-sales (P/S) ratio of 2.4. If Spotify had 10% profit margins today, that would give the stock a price-to-earnings (P/E) ratio of about 24. To be clear, the company isn’t making much, if any, profit at the moment, which is probably why the stock is down so much. . But with a long growth path ahead of that and low P/S, Spotify stock looks like a solid buy at these prices.

SPOT Revenue (TTM) chart

SPOT Revenue (TTM) data by YCharts.

2. Dropbox: down 32.2% from a 52-week high

Unlike Spotify, drop box (DBX -1.37% ) Very profitable and generates tons of cash. The file-sharing and workflow platform generated $707 million in free cash flow last year, which, compared to a market capitalization of $8.5 billion, gives the stock a low price to free cash flow (P/FCF) ratio of 12. The stock trades down about 32.2 % from a 52-week high in September 2021.

So what does it give? Why are Dropbox stocks so cheap right now? There are two reasons that come to mind. First, Dropbox has a lot of competition from the likes Microsoftand the alphabet and apple. All these tech giants own file-sharing services, and Alphabet’s Google Drive is offered free to hundreds of millions of users around the world. Given the scale and ability to abandon these services, investors are likely to be afraid of Dropbox’s long-term viability as a company. However, I think this bear case is flawed because Dropbox has steadily grown its business even though these offerings have been around for five years. In 2018, Dropbox had 12.7 million paid users with an average revenue per user (ARPU) of $119.60. At the end of 2021, it had 16.8 million paying users with an ARPU of $134.78.

So not only has Dropbox been able to grow its users while the tech giants undermine it with free products, it has actually been able to charge more for its services over time. That’s because file sharing is a sideshow for the tech giants (Google Drive hasn’t been updated in years), and with Dropbox in focus, it’s been able to build a better value proposition for creators and small businesses.

In 2022, Dropbox is driving about $2.33 billion in revenue and a range of $760 million to $790 million in free cash flow. If it hits its revenue target, it would be just 8% year-over-year growth, which might make some tech investors shy that Dropbox isn’t growing as fast as some of the favorite investments. However, with such a discounted cash flow multiplier, Dropbox doesn’t need to grow much in order to be a worthwhile investment over the next decade, which is why I think it could be a low-risk bet for tech investors to buy right now.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of the Motley Fool Premium Consulting Service. We are diverse! Asking about an investment thesis — even if it’s our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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