2 stocks to buy on Netflix’s decline

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The earnings season started with a bang when netflix ( NFLX -0.96% ) announced its first quarter results this week. The company’s report surprised on the downside, noting subscriber losses for the first time in a long time and offering indications that the weakness will continue into the second quarter. The stock price fell precipitously in the days following the release, and the stock is down around 38% in the past five days alone.

Along with Netflix’s downfall, investors moved to sell other consumer internet companies, even though they don’t compete in the video streaming business. This gave long-term investors the opportunity to buy high-quality companies at a discount. Here are two such actions.

Image source: Getty Images.

1.Spotify

Spotify ( PLACE -1.93% ) is the leading audio streaming app in the world. The company has 180 million premium subscribers to the ad-free version of the music service and 406 million monthly active users (MAUs). These numbers have steadily increased since Spotify’s debut in the public markets in early 2018. In Q4 2017, MAUs totaled 160 million and premium subscribers were 71 million, meaning Spotify more than doubled these two figures in five years. In the long term, management believes it can achieve over 1 billion MAU.

The majority of Spotify’s business right now is premium music streaming. In the fourth quarter of 2021, premium subscriptions grew revenue 22% year-over-year to $2.5 billion, for an annual run rate of $10 billion.

The premium business has plenty of growth ahead, but the highlight for Spotify right now is advertising, which was up 40% year-over-year in the fourth quarter to $427 million. Advertising is booming due to Spotify’s huge embrace of podcasts and the launch of its dynamic advertising marketplace called Spotify Audience Network (SPAN) where advertisers can easily advertise music and podcasts.

Spotify is now the market leader for podcasts in many key countries around the world, and the industry is expected to experience double-digit growth this decade. Thus, the advertising segment looks set to grow its revenue at a high rate for many years to come.

As of this writing, Spotify shares are down 20% in the past five days without company-specific news and are now trading at an enterprise value of around $20 billion. In 2022, the average Wall Street analyst expects the company to generate $12.5 billion in revenue. Over the next few years, that number is expected to increase as premium music and advertising businesses continue to grow.

If you believe Spotify can make double-digit profit margins as the business matures – which seems reasonable given its 25% gross margins which management says can increase – the stock is trading at a normalized value-to-earnings ratio for the company ratio of 16, just around the market average. Given Spotify’s potential to sustain high revenue growth for many years to come, that makes the stock a bargain at these prices.

2. Match Group

Matching group (MTCH -0.44% ) is the world leader in online dating. It has services like Tinder, Hinge, and Match.com, where people of different ages and demographics can try to meet romantic partners. In Q4 2021, Match had 16.2 million paying users across its services, up 15% year-over-year.

The beautiful thing about Match Group is that it has consistently grown revenue at a high rate while generating healthy profits. Since 2017, revenue has grown 22% annually, from $1.33 billion to just under $3 billion in 2021.

At the same time, its adjusted operating margin never fell below 35%, while the company had to pay 25% to 30% of its turnover to mobile application stores. Call me crazy, but this looks like a company on a centuries-old tailwind with a phenomenal unit economy.

Growth is also expected to continue over the next five years. Tinder, which generates more than 50% of Match’s revenue, grew revenue 22% year over year and should see a catalyst with the end of the pandemic.

Hinge also holds great promise for the company. The app only generates $197 million in annual revenue, but it’s increased that by over 100% in 2021 and over 535% since 2019. Over the next few years, Hinge will focus on improving its monetization and international expansion. (it’s only available in English-speaking markets at the moment), whose management hopes revenue will continue to grow at a high rate.

Over the past five days, Match Group’s stock is down 19% and now trades at a market capitalization of $22 billion. With operating earnings of $852 million last year, that gives the stock a price-to-operating earnings ratio of 25.8. It’s not terribly cheap on a tracking basis, but with a company that has such a strong track record of growth, we might look back five years and think Match Group was a bargain at these 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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