The software sector is going through a sharp decline in 2022 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 being caused by investor fears of an impending recession, inflation and rising Federal Reserve interest rates.
While scary, this drawdown should present some great buying opportunities if you have the strength and time horizon to invest 10 years or more. Here are two great software stocks to buy this year and hold for the long term.
First of all we have Wix.com (WIX 11.04%). Wix is a leading website builder for individuals and small businesses that charges recurring subscriptions for access to URLs, customization tools, and back office management. As Shopifyit also offers tools that enable its customers to sell products online and collect payments for services.
Unlike traditional website building that requires a lot of software development, Wix offers its customers out-of-the-box solutions that allow them to create high-quality websites without any coding skills. Dubbed Software-as-a-Service (SaaS) CMS platforms, these website builders have been rapidly gaining market share over the past decade, from 18% in 2011 to 37% in 2021. Wix is one of the leading SaaS -CMS platforms, one in four new CMS websites are now built using the service.
This long-term tailwind has resulted in strong customer and financial growth for Wix. The company had 6 million paid subscribers at the end of 2021, up from less than 1 million in 2013. Over the past 10 years, thanks to that growth in paid subscribers and price increases, revenue has grown by over 2,000%. Though the company hasn’t generated consistent cash flow, it has excellent gross margins at 61% in the first quarter. That number should increase over time as the company scales its e-commerce and payments businesses, which are still in their early stages.
In 2022, management expects Wix’s free cash flow margin to be between 2% and 5%. By 2025, it hopes to increase margins to around 20% while still generating $2.5 billion in revenue. For reference, the company has generated revenue of $1.3 billion in the last 12 months. At this projected level for 2025, Wix will generate $500 million in annual free cash flow. 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 well below the market average. If the company can hit those projections, the stock will likely be a lot higher five years from now.
Second on our list is the restaurant SaaS platform oops (OLO 3.49%). The company went public in early 2021, but has seen its stock tank alongside many new software companies. Shares are down 73.6% since the IPO. With Olo’s software products, Quick Service Restaurants (QSRs) can easily manage service, take orders and interact with customers from all the different digital ordering platforms. The core products include ordering, delivery and payment.
Big companies like Denny’s, PF 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 over 600 brands, 82,000 restaurants and 2 million daily orders flowing through the platform, Olo is a sizable business today. It’s forecasting 2022 sales of $195 million to $197 million, and while operating margins are only close to breakeven, the company has strong gross margins of 70%.
Managed locations have grown at a compound annual growth rate (CAGR) of 31% from 2018 to 2021, and average revenue per unit has grown at a 29% CAGR over the same period. If these trends continue over the next few years, Olo’s consolidated revenue should continue to grow at a comfortable pace. With strong gross margins and a returning customer base, this should ultimately translate into strong profit and cash flow margins. With a market cap of under $1.5 billion, now seems like a good time to start and hold a position in Olo stock for the long term.