Picking Through The Tech Wreck: 3 Bargain Stocks

Tech shares have been crushed thus far in 2022 with the Nasdaq (QQQ) off more than 30% year-to-date. This sell-off has created what I believe to be a great opportunity for long-term investors to buy shares of growing, wide moat businesses with leading market positions at bargain prices. Today I will highlight three stocks I’ve been buying.

Criteria:

• Down at least 30% thus far in 2022
• Expected growth rate in free cash flow of at least 10% per year
• Sells for less than 18x 2024 estimated free cash flow

Salesforce (CRM)

Global software-as-a-service (SaaS) customer relationship management (CRM) leader Salesforce shares have been destroyed in 2022, falling 51% year-to-date and 19% since reporting results last week. In addition to the broad sell-off in SaaS, investors are concerned about recent management departures (co-CEO Bret Taylor and Slack founder Stewart Butterfield) at Salesforce as well as slowing revenue growth. While Taylor’s resignation does come as a surprise, Butterfield’s departure comes as less of a surprise after having (and earned a billion dollar payday) sold Slack to Salesforce at the top of the market in late 2020.

Given the economic slowdown in 2022, it isn’t surprising to see customers hitting the pause button when it comes to signing new deals. Even in a tougher economy, Salesforce will likely post double digit top-line organic growth and mid-to-high teens growth in operating profit and free cash flow. Software is a fantastic business which generates recurring revenue – even in a tough economy. In addition, Salesforce benefits from a broad product offering which allows it to grow revenue through selling additional products to its customers.

At $130 per share, I have Salesforce trading at an enterprise value to 2024 expect free cash flow multiple of just 15x. This is far too low for a business with a captive customer base that should continue to grow free cash flow at a mid-teens rate for the next several years. Looking out to 2024, I see Salesforce trading at $200 per share, equivalent to 22x free cash flow (and taking into account its balance of net cash & investments) which suggests nearly 55% upside from today’s price.

Uber shares are off nearly 40% in 2022. Aside from aversion to all things tech and concern about a recession, I’m not sure why investors have turned a cold shoulder to Uber – the company has produced a dramatic improvement in results – its core mobility segment is now solidly profitable. In mobility Uber has a 70% market share in most markets globally. As many readers have noticed, Uber and Lyft (LYFT) are no longer engaged in the same fierce competitive battle that we saw in 2018-2019. This has allowed Uber to meaningfully increase its take rate (share of revenue per trip) and increase profitability.

Similarly, Uber Delivery (f/k/a Uber Eats) is now profitable after several years of losses. This business has tremendous potential going forward as ghost kitchens should allow faster, cheaper deliveries which could lead to above market growth for many years.

Uber is on-track to deliver on its goal of producing $5 billion in 2024 EBITDA. With limited capital expenditures and many years of tax-loss carry forwards, I see Uber generating $2 per share of free cash flow per share in 2024. Applying a 20x multiple (and adding in Uber’s net cash & investments) get me to a value of $45 per share or 70% upside.

Meta Platforms (META)

Meta has become a battleground stock in 2022. Shares of the world’s second largest ad platform (behind only Alphabet (GOOG) (GOOGL)) are off more than 66% year-to-date as Meta’s core Family of Apps business has suffered from increased competition from TikTok, continued negative impacts from Apple’s (AAPL) privacy changes, and a significant slowdown in the digital advertising market. Last but not least are concerns about the company’s massive ($14+ billion) annual spending to build CEO Mark Zuckerberg’s vision of the Metaverse. The aforementioned factors have conspired to negatively impact EPS which is expected to decline from $13.80 in 2021 to just over $9 for 2022 (-35%).

While the market has no shortage of concern, I see things a bit differently. I see Facebook, Instagram, and WhatsApp as being wide moat businesses which practically speaking are unlikely to be matched by competitors. People have invested time and energy to develop their friend/follow networks and upload content/photos. There does not seem to be a propensity to move elsewhere for established users (as evidenced by stable/growing user count). Meta’s tremendous financial resources allow the company to invest heavily in building the best AI to keep users engaged (and importantly viewing ads).

Looking forward, I see a number of reasons why investors can expect free cash flow growth looking beyond 2023:

• Apple’s privacy changes are now fully embedded in reported numbers. The company has invested tens of billions into AI to better target users and improve the efficiency of its advertising which should allow Meta to earn more for each ad.
• Impact of significant cost cuts. Thus far Meta has laid off 11,000 employees and is vacating several office properties (lower rent expense) which will result in billions of annual savings.
• While the economy is slowing and we very well may be headed toward a recession, eventually the economy will recover and so will Meta
• Monetization of WhatsApp
• Capital expenditures, which are currently elevated to fund AI initiatives, returning to historical mean

I see Meta doing roughly $10 per share in free cash flow in 2024 and think that this will grow 10-12% for the next several years, possibly faster depending on the pace of share buybacks. Applying a 15x multiple (and adding in cash & investments) gets me to a $170 valuation or 50% upside from today’s price.

Conclusion

While 2022 has been an ugly year for investors, the upshot is that today’s share prices represent a terrific opportunity for patient, long-term investors to buy great companies at low prices.