2 software stocks that could help you strike it rich

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The past few months have been tough for software vendor owners. the iShares Tech-Software Sector ETF (NYSEMKT:IGV) is down 22% in the last three months alone, with many companies down nearly 50% in this bracket. Compared to the broad stock indices, all of which are down less than 10% over the same period, a lot of these software/tech stocks have been put on the chopping block.

But big drawdowns offer big opportunities. With software stocks trading at much cheaper valuations, here are two you could buy to help you strike it rich.

Image source: Getty Images.

Autodesk

Our first candidate is Autodesk (NASDAQ:ADSK), a software company with a market cap of $53 billion. It serves many markets but focuses on architecture, engineering and construction (AEC); mechanical engineering and manufacturing, and media. It is a serial acquirer, typically buying small software companies to enter new markets, using its large war chest to increase market share.

Revit, Autodesk’s most revenue-generating product today, is a classic example. Autodesk acquired Revit in 2002 for $133 million. Today, it makes up the majority of Autodesk’s AEC segment, which posted more than $500 million in revenue last quarter. Revit has grown so much because it is the best building information modeling (BIM) software, a standard for 3D modeling/simulation of real buildings. Many countries and companies adopt it. This may be a tailwind for Autodesk as Revit is expected to gain more and more subscribers over the next 10 years.

In addition to Revit, Autodesk serves the mechanical design/manufacturing industry with Fusion 360, on-site construction teams with Autodesk Construction Cloud (ACC), and 3D animation with Maya. It also has many other smaller programs, like Innovyze (water management), Civil 3D (civil engineering), and Forge (a cloud-based development platform). This gives Autodesk a diversified revenue base that can insulate it if an end market struggles over a period of time.

For fiscal year 2023 (calendar year 2022), management expects free cash flow of $2.4 billion, with double-digit annual growth through 2026. Compared to its current market capitalization of $53 billion dollars, this gives Autodesk shares a forward price for available cash. flow (P/FCF) of 22 if it can achieve that 2023 guidance. With tailwinds from Autodesk and the sustainable markets it serves, the stock is an easy buy at current prices.

Wix

Unlike Autodesk, Wix.com (NASDAQ:WIX) is a relatively simple company that sells subscriptions for web hosting, URLs, and commerce websites. The company was founded in Israel in 2006 and has since become one of the world’s leading web design companies, with a market share of 2.9% worldwide in 2021, compared to just 0.6% in 2017 .

Wix sells access to its web hosting platform for a monthly, annual, or multi-year subscription fee. Customers can choose different subscription levels depending on how many features they want and if they want to sell products through the Wix eCommerce system. At the end of the last quarter, the company had more than 215 million registered users. Many of them are on Wix’s free tier which doesn’t offer a custom domain, but they’re in a great funnel that leads to paying subscribers over time.

Management divides the company into two segments: Creative Subscriptions and Enterprise Solutions. Creative subscriptions are simple web hosting services, while business solutions are for e-commerce and payments. The creative subscriptions segment currently accounts for the majority of Wix’s revenue, hitting $992 million in annual recurring revenue last quarter with gross margins of 76%. Enterprise solutions are much smaller and their margin is lower, but they are growing fast. Business solutions revenue grew 55% year-over-year in the third quarter, compared to just 19% for creative subscriptions. However, the business solutions segment only has 19% gross margins.

With a market capitalization of $6.84 billion and 12-month gross profit of $761 million, shares of Wix are currently trading at a price over gross profit (P/GP) of 9. Given its track record of double-digit growth and the gigantic market opportunity it seeks in web hosting, a P/GP less than 10 years old seems like a steal for anyone with a multi-year time horizon for this business. This makes Wix stock a great buy at current prices.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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