Global stock markets are suffering through a period of uncertainty that kicked off in November 2021. A mixture of high inflation, rising interest rates, and geopolitical tensions across Europe has suppressed investors' appetite for risk, sending the Nasdaq 100 technology index 20% lower, and into a technical bear market.
But it's not all bad news. For patient investors, the recent sell-off could mark a long-term buying opportunity. Three Motley Fool contributors think Workiva (WK -0.76%), Datadog (DDOG -1.59%), and Block (SQ -2.03%) are great candidates to buy after their steep declines in stock price. Here's why.
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A data unification powerhouse
Anthony Di Pizio (Workiva): Setting the steep 41% decline in its stock price aside, Workiva continues to deliver strong operational results for investors. The company's data unification platform is playing a key role in the digital economy, where more organizations are embracing remote work and require innovative tools to maintain smooth workflows.
Workiva focuses on aggregating data across dozens of different applications. Whether a team is working in Microsoft Office or Alphabet's Google Cloud, Workiva pulls the data to one central location, providing management with greater visibility over employees who might be in entirely different locations. One use case for this tool is compiling regulatory filings, and Workiva currently supports over 350 Securities and Exchange Commission forms, making it a no-brainer tool for public companies. It's primarily why eight out of the world's 10 largest banks are using it.
But the company has also recently made investments in its environmental, social, and governance (ESG) reporting capabilities, as more organizations are demanding tools to help them track their sustainability initiatives.
Naturally, Workiva becomes more useful among larger workforces, which is why the company is experiencing the fastest growth among its highest-spending customers. In 2021, the portion of Workiva's customer base that spends $300,000 or more annually grew by 54% compared to 2020, trouncing the 15% growth in its customer base overall. It led to $443 million in full-year revenue, representing 26% growth from 2020, and analysts expect the company to cross the half-billion dollar mark for the first time ever in 2022.
Workiva isn't profitable just yet, because it's still investing heavily in its business to build scale. For example, it's spending 40% of its revenue on sales and marketing alone. But the company has the wind at its back when it comes to shifting workplace trends -- more organizations are offering hybrid work arrangements to attract talent, making Workiva's platform increasingly important.
In fact, some data suggests 85% of managers expect remote work to become the new normal, and that makes the recent dip in Workiva stock an attractive entry point for the next decade and beyond.
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The leader in observability continues to dominate
Jamie Louko (Datadog): Shares of Datadog have been on a bumpy ride since September 2021. Shares sunk in January, but after a stellar earnings report, the company popped. However, with the stock market seemingly going nowhere but down, shares gave up those gains and are back down 35% from their all-time highs. However, Datadog's infrastructure observability and performance monitoring platform is continuing to get quickly adopted, and that did not change in the fourth quarter.
The company reported incredible revenue growth of 84% year over year in Q4 to $326 million, and this was driven by its large customers and expanding customer relationships. Its customers spending over $1 million annually jumped 114% year over year in Q4, likely helped by the fact that one-third of its customers used four or more products at the end of Q4 2021, which grew from 22% in Q4 2020. This increased engagement and usage demonstrates the major long-term tailwinds at Datadog's back with the shift to cloud infrastructure.
Another growth opportunity that Datadog has in the future is expansion into the government sector. In Q4, the company got FedRAMP Authorization, meaning it will now be able to sell its products to government entities and public sector businesses. These customers tend to have deep pockets, which means that Datadog's large customer pool could continue growing at a fast rate.
Datadog shares still trade at 38 times sales -- a high valuation, especially after the tech sell-off. Other high-growth cloud stocks like Confluent have slid much more: Confluent's price-to-sales multiple was in line with Datadog's in the months before the sell-off, and now its valuation has sunk to 22 times sales. However, that doesn't mean Datadog isn't worth buying today. As the cloud becomes more widespread, security and application performance monitoring will quickly become need-to-haves for businesses and government agencies, and with Datadog's leadership in the space, it will likely benefit immensely over the coming years.
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Democratizing financial services
Trevor Jennewine (Block): Traditionally, businesses that wanted to accept payment cards have worked with banks and other financial institutions to get the necessary hardware, software, and services. But those providers almost always bundle products from different companies, which means those systems can be difficult to implement and maintain, especially for smaller businesses that lack a sizable IT team. That's where Block can make a difference.
Its Seller ecosystem is a cohesive, self-service suite of hardware, software, and services, comprising all of the tools needed to manage a business across physical and digital channels. That includes everything from point-of-sale (POS) systems and payroll software to banking products like deposit accounts and loans. Not surprisingly, Block's comprehensive approach to commerce has translated into strong adoption. In fact, sellers using four or more Square products accounted for 38% of gross profit in 2021, up from just 10% in 2016.
Block's Cash App ecosystem is built with a similar focus on simplicity, only it's designed to help consumers manage their money. Cash App blends banking and brokerage services, allowing users to send, spend, and invest money, and file their taxes from a single mobile app. In 2021, monthly active users jumped 22% to 44 million, and more than 31% of those people now use the Cash Card (a debit card linked to the mobile app) on a monthly basis, up from 26% in 2020. That's noteworthy because Cash App users generate more gross profit with each additional product they adopt.
Last year, strength across both ecosystems helped Block turn in a solid financial performance. Gross profit soared 62% to $4.4 billion, and free cash flow hit $714 million, up from $35 million in 2020. Better yet, Block is well positioned to maintain that momentum. Mid-market sellers (at least $500,000 in annual sales) now account for 37% of gross payment volume, up from 17% in 2016, and that upmarket movement bodes well for the Square ecosystem, evidencing its growing importance in the commerce industry. At the same time, the Cash App ecosystem allows Block to monetize consumers through digital payments and brokerage services for stocks and Bitcoin, and both should be significant tailwinds for the company.
Currently, Block is down 63%, and the stock is trading at 2.9 times sales -- its cheapest valuation in the past three years. That's why now looks like a good time to buy a few shares.
