2022 has not been kind to growth stocks. The Russell 1000 Growth index is down 12.6% year to date, nearly doubling the 6.7% downtick in the S&P 500 index.
Many top-notch growth stocks took even harsher body blows in the first few months of the new year. Digital payments specialist Block (SQ 2.67%) is down 21.9% over the same period, and cryptocurrency market operator Coinbase Global (COIN -0.33%) suffered a 38.7% price drop. Their charts plunge even deeper if you go back to the high points of mid-November:
The plunging chart lines may look scary, but I'm thrilled to see Coinbase and Block trading at bargain-bin share prices. These stocks are incredible buys right now.
The two companies under my microscope today have a lot in common beyond their drooping stock charts. I'm looking at two fast-growing companies in the digital finance space. They are leaders in their chosen markets, and the potential for astounding long-term growth is massive in both cases.
Furthermore, both Coinbase and Block are tightly connected to the cryptocurrency market. Coinbase owns some Bitcoin (BTC 0.31%), to the tune of $186 million at current crypto prices. However, Block owns nearly twice as much Bitcoin, currently valued at $333 million. Bitcoin prices have also trended downward in recent months, but not as quickly as Block's and Coinbase's stock prices. To me, that's the first sign that something is wrong with this picture.
Block is a global powerhouse in computerized payment services, generating $710 million of free cash flow in 2021 while revenue surged 86% higher. Coinbase entered the public stock market last year, lifting its top-line revenue from $1.3 billion to $7.8 billion. Meanwhile, Coinbase's free cash flow soared from $3.0 billion to $10.6 billion. We're talking about two well-oiled cash machines with turbocharged top-line sales growth.
We don't have multiyear financial data for Coinbase yet, but this peek at Block's long-term result will show you what I mean:
Buy on the dip
Despite these healthy business results, market-makers thought that the two stocks were riskier than the broader market, riskier than growth stocks overall, and riskier than owning Bitcoin directly.
To paraphrase master investor Benjamin Graham, the market is an unpredictable popularity contest in the short term, but a reliable business measurement system in the long run. Today, Block and Coinbase are on sale because many investors are nervous about the market as a whole. Over the next few years and decades, I expect their stock prices to reflect their rock-solid financial results.
That's why I think you should buy Coinbase and Block shares on the temporary dips along the way, and the current situation absolutely qualifies as a passing dip.