2 Best Software Stocks to Buy in 2022 and Beyond

The software sector is experiencing a sharp decline in 2022. The 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 index history. These price declines are driven by investor fears of an upcoming recession, inflation and rising Federal Reserve interest rates.

While scary, if you have the guts and time horizon to invest for 10 years or more, this pullback should present some nice buying opportunities. Here are two great software stocks to buy this year and hold for the long term.

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1. Wix.com

First of all, we have Wix.com (WIX -3.77%). Wix is ​​a leading website builder for individuals and small businesses, charging recurring subscriptions for access to URLs, customization tools, and back-office management. As Shopifyit also offers tools for its customers to sell products online and collect payments for services.

Unlike traditional website building, which requires a lot of software development, Wix provides out-of-the-box solutions for customers, allowing them to build quality websites without coding expertise. These website builders, referred to as SaaS (software as a service) CMS platforms, have rapidly gained market share over the past decade, growing from 18% in 2011 to 37% in 2021. Wix being the one of the leading SaaS CMS platforms. , one in four new CMS websites are now created using this service.

This centuries-old tailwind has led to 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, revenue has increased by more than 2,000%, thanks to this growth in paid subscribers and to price increases. Although the company has not generated consistent cash flow, it has strong gross margins, at 61% in the first quarter. This number is expected to increase over time as the company expands its e-commerce and payments business, which is still in its infancy.

In 2022, management expects Wix’s free cash flow margin to be between 2% and 5%. By 2025, it hopes to increase its margins to around 20% while generating $2.5 billion in revenue. For reference, the company generated $1.3 billion in revenue over the past 12 months. At these projected 2025 levels, Wix will generate $500 million in free cash flow per year. The current market capitalization of $3.16 billion gives the stock a free cash flow (P/FCF) of 6.3, which is well below the market average. If the company can meet those projections, the stock will likely be much higher five years from now.

2.Olo

Second on our list is the restaurant SaaS platform Olo (OLO -5.37%). The company went public in early 2021, but has seen its stock alongside many new software companies. The shares are down 73.6% since their IPO. Olo’s software products allow Quick Service Restaurants (QSRs) to easily manage service, take orders and interact with customers from all different digital ordering platforms. Its main products include ordering, delivery and payments.

Large companies like Denny’s, PF Chang’s and Wingstop pay for Olo’s services because they increase employee efficiency and help improve the customer experience, from taking orders to receiving food. With more than 600 brands, 82,000 restaurants and 2 million orders per day passing through its platform, Olo is now a sizeable company. It projects 2022 revenue to reach $195-197 million, and while operating margins are only close to breakeven, the company has strong gross margins of 70%.

Locations under management grew at a compound annual growth rate (CAGR) of 31% from 2018 to 2021, and average revenue per unit grew at a CAGR of 29% over the same period. If these trends continue over the next few years, Olo’s consolidated sales should continue to grow at a good pace. Going forward, with strong gross margins and a repeat customer base, this should translate into strong profit and cash flow margins. With a market capitalization below $1.5 billion, now seems like the perfect time to start a position in Olo shares and hold it for the long term.

About Dora Kohler

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