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2 Software Stocks That Could Help Make You a Fortune

The Motley Fool
The Motley Fool
 2022-01-28

The last few months have been tough for owners of software companies. The iShares Tech-Software Sector ETF (NYSEMKT: IGV) is down 22% in the last three months alone, with many companies down close to 50% within this bucket. Compared to the broad market indexes, which are all down less than 10% over the same time period, a lot of these software/technology stocks have been taken to the woodshed.

But big drawdowns provide big opportunities. With software stocks trading at much cheaper valuations, here are two you could buy to help make you a fortune.

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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 has a focus on architecture, engineering, and construction (AEC); mechanical engineering and manufacturing, and media. It is a serial acquirer, typically buying small software companies as a way to enter new markets, using its large war chest to expand market share.

Revit, Autodesk's top revenue-generating product at the moment, is a classic example of this. Autodesk acquired Revit in 2002 for $133 million. Today, it makes up the majority of Autodesk's AEC segment, which had over $500 million in revenue just last quarter. Revit has grown so much because it is the top software program for Building Information Modeling (BIM), a standard for 3D modeling/simulation of real world buildings. Many countries and companies are adopting it. This can be a tailwind for Autodesk as Revit should gain more and more subscribers over the next 10 years.

On top of Revit, Autodesk serves the mechanical/manufacturing design sector with Fusion 360, on-site construction teams with the Autodesk Construction Cloud (ACC), and 3D animation with Maya. It has many other smaller programs as well, like Innovyze (water management), Civil 3D (civil engineering), and Forge (a cloud-based development platform). This gives Autodesk a diverse revenue base that can keep it insulated if one end market goes through struggles in a given period.

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

Wix

Unlike Autodesk, Wix.com (NASDAQ: WIX) is a relatively simple business 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 leaders in web design globally, with a 2.9% market share worldwide in 2021, up from only 0.6% in 2017.

Wix sells access to its web-hosting platform for a monthly, yearly, or multiyear subscription fee. Customers can choose different subscription tiers depending on how many features they want and whether they want to sell products through Wix's e-commerce system. At the end of last quarter, the company had over 215 million registered users. A lot of these are on Wix's free tier that doesn't offer a custom domain, but they are in a great funnel that leads to paying subscribers over time.

Management divides the company into two segments: creative subscriptions and business solutions. Creative subscriptions are simple web-hosting services, while business solutions are for e-commerce and payments. The creative subscriptions segment accounts for the majority of Wix's revenue right now, reaching $992 million in annual recurring revenue last quarter with 76% gross margins . Business solutions is a lot smaller and lower margin, but growing quickly. Business solutions revenue grew 55% year over year in the third quarter compared to only 19% for creative subscriptions. However, the business solutions segment only has 19% gross margins.

At a market cap of $6.84 billion and trailing-12-month gross profit of $761 million, Wix stock trades at a price to gross profit (P/GP) of 9 right now. Considering its track record of double-digit growth and the gigantic market opportunity it is going after in web hosting, a P/GP under 10 seems like a steal for anyone with a multiyear time horizon for this business. This makes Wix stock a great buy at current prices.

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Brett Schafer owns Autodesk and Wix.com. The Motley Fool owns and recommends Autodesk and Wix.com. The Motley Fool has a disclosure policy .

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