Though they're harder to find than before, one can still discover growing, well-positioned, software firms trading at moderate valuations.
Here's a look at three software firms that -- unlike many peers that sport much loftier multiples following strong 2018 run-ups -- are trading at discounts thanks to recent selloffs.
Electronic Arts's (EA) shares plunged in late August after the gaming giant cut its fiscal 2019 (ends in March 2019) bookings guidance by $350 million to $5.2 billion. EA blamed a one-month delay for the launch on anticipated first-person shooter Battlefield V, along with currency swings and a weaker outlook for its mobile gaming business.
While the mobile softness is a cause for some concern, given how competitive the mobile gaming space is, EA obtained less than 13% of its fiscal 2018 revenue from mobile games. And while the Battlefield V delay is disappointing, the game will still be launching before Thanksgiving.
Meanwhile, EA continues to possess a slew of marquee gaming franchises (Battlefield, Madden, FIFA, etc.) at a time when global gaming spend continues to steadily rise, and has increasingly become effective at monetizing its franchises via subscriptions and digital content sales in addition to traditional game sales. The company recently launched Origin Access Premier, a $15-per-month PC gaming service that (unlike the cheaper Origin Access service) will support EA's full PC game library, and in February will launch anticipated online multiplayer shooter Anthem.
EA now sports an enterprise value (market cap minus net cash) equal to 18.5 times its expected fiscal 2020 (ends in March 2020) free cash flow (FCF). That's a noticeable discount relative to rival Activision (ATVI) Blizzard, which has an EV equal to 25.2 times its 2019 FCF consensus.
Zuora (ZUO) , a leading provider of cloud software used by companies to bill, account for and otherwise manage their subscription-based products and services, turned in a strong IPO in April and added to its gains in the following months. However, shares fell sharply in late August after Zuora used its July quarter earnings call to forecast a slowdown in billings growth, and have remained under pressure in September. They're now 39% below a June high of $37.78.
However, Zuora is still a company that expects subscription billings for its software to grow at a 25% to 30% annual rate over the long-term, as companies in a variety of markets and industries embrace subscription-based business models. It's also a firm that has built up a blue-chip customer base featuring the likes of Zillow, Autodesk, General Motors and Illumina, and which has a lot of room to cross-sell many of those clients on complementary products.
Zuora now has an EV equal to 8.6 times its expected fiscal 2020 billings. That's not a dirt-cheap valuation, but lower than that of many software-as-a-service (SaaS) peers and not unreasonable if the company can hit its long-term growth targets. Like many growth-stage SaaS firms, Zuora is still losing money; earlier this year, the company set a goal of becoming cash-flow positive in three years.
Don't let media descriptions of Dropbox (DBX) as a "cloud storage company" fool you. This is a SaaS company at heart -- one whose apps and developer ecosystem have gone a long way towards helping it steadily grow its paid subscription base and deal with intense price competition from tech giants. Revenue rose 27% annually in Q2, and is expected on average by analysts to grow 24% in 2018.
Dropbox is also a company that -- thanks to relatively low sales/marketing spend and a heavy reliance on its own cloud infrastructure for file storage -- has a cash-flow profile very different than that of many SaaS peers. The company produced $305 million in FCF in 2017; for 2018 and 2019, consensus estimates are at $354 million and $458 million, respectively.
Dropbox delivered a strong IPO in March, and then shot higher in June amid M&A speculation. However, in spite of the company's posting of a a fairly solid earnings report in mid-August, its stock has had a rough time since then. Shares now trade 9% below a post-IPO opening trade of $29.00. Lingering concerns about Dropbox's enterprise strategy -- the company has a limited enterprise salesforce, and gets much of its revenue from consumers and small and mid-sized businesses -- could be playing some role here.
Regardless, Dropbox's valuation now appears pretty reasonable: The company sports an EV equal to 7.3 times its expected 2019 billings. And with Dropbox's revenue consensus implying just 16% growth next year, 2019 estimates might be conservative.