These great businesses are suddenly trading at a steep discount.
The only upside to living through a bear market is that there are amazing bargains to be had. Even great companies with strong growth prospects can see their share prices get whacked.
Mastercard(NYSE:MA), Square(NYSE:SQ), and Autodesk(NASDAQ:ADSK) are all great businesses that have been recently tossed in the discount bin. I own shares of all three of these companies myself, and would happily add to my position in each of them at today’s prices.
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Payment processing giant Mastercard is one of the most rock-solid businesses on the planet. The company has pumped out double-digit revenue and profit growth for years, and that consistency has made it a Wall Street darling. That’s why its stock rarely goes on sale, so its recent decline — shares are currently down 37% from their February highs — represents a tremendous opportunity.
Mastercard generates revenue by keeping a tiny slice of all the money that flows through its network. In 2019, the company processed $6.5 trillion in payments, which was up 12% over the prior year. All of those small fees added up to $16.9 billion in revenue.
The beauty of Mastercard’s model is that it costs next to nothing to process one more payment. This allows an ever-increasing portion of the company’s revenue to flow straight to the bottom line. Management has used its profit stream to buy back stock, pay a growing dividend, and make tuck-in acquisitions.
Management recently dialed back its near-term guidance, stating that the novel coronavirus is going to slow its revenue growth to “just” 9% to 10% in the first quarter. That fear is a big reason why shares have taken such a short-term hit.
Longer-term, I have no doubt that the convenience of paying with plastic will continue to win over consumers across the planet. Buying shares of this perennial winner while they are in the discount bin is likely to be a profit-friendly move.
Square is also in the payment processing space, but there’s far more to its business than just that. Square sells a complete ecosystem of hardware and software products that cater to the needs of small and medium-sized businesses. This includes tools that help sellers with order management, inventory, cash flow management, analytics, and even customer engagement.
Square’s products have become hugely popular, which has driven rapid financial growth. Last year, the company’s revenue soared 43% to $4.7 billion. Management guided for 30% revenue growth in 2020, too.
That progress hasn’t mattered to investors recently. Square’s stock has been cut in half in just the last few weeks.
Square’s sell-off isn’t completely unjustified. More than 40% of Square’s revenue comes from small and medium-sized consumer discretionary businesses like restaurants and retailers, which are no doubt feeling the pain right now. That fact is likely to curtail Square’s 2020 growth.
The near-term hit could be painful, but Square has a proven business model in place and management pegs its total addressable market at $59 billion. I’m confident that this company’s hypergrowth will ramp back up once a recovery takes hold.
Autodesk is a leading provider of computer-aided design (CAD) software. Its products have been used by engineers, designers, architects, construction professions, and entertainers for decades to help them create anything that they can dream up.
Autodesk’s revenue used to wax and wane with economic growth, which made its results unpredictable. However, a few years ago the company shifted to a software-as-a-service (SaaS) business model, which should go a long way toward smoothing out the ride during this downturn.
Longer-term, Autodesk has a huge opportunity to grow just from its current base of users. About 18 million people currently use Autodesk’s products, but only about 5 million of them have are paying subscribers to the SaaS platform — the rest are still utilizing old versions of the company’s products.
It’s only a matter of time before those holdouts upgrade and become paying subscribers. That provides Autodesk with high levels of revenue and profit visibility that other businesses can only dream of. With shares currently down 29% from their February high, I think this is a fine time for investors to get in.