Despite rebounding last week, the Nasdaq Composite is still in bear market territory. The tech-heavy index is 28% off its November high, dragged down by uncertainty regarding the strength of the economy. But while Wall Street is worried about the next few weeks and months, you can capitalize on the current downturn by focusing on a longer time horizon.
With that in mind, disruptive businesses like Block (SQ 5.04%) and Cloudflare (NET 3.77%) are shaping the future of the financial services and cloud computing industries, respectively. And with both stocks trading 75% (or more) off their all-time high, it's time to buy.
Here's what you should know.
1. Block
Block is disrupting the retail and financial services industries. Through its Square ecosystem, the company offers an integrated suite of hardware, software, and services that simplify business management across physical and digital locations. That distinguishes Block from traditional merchant acquirers like banks, as they often bundle products from different vendors. That makes implementation more complicated, especially for small businesses that lack robust tech support.
However, the flexibility and cohesive nature of Square's commerce platform is also drawing mid-market merchants (those making over $500,000 per year) to the ecosystem. In fact, mid-market merchants accounted for 35% of gross payment volume in first-quarter 2022, up from 26% in Q1 2020. That's noteworthy because mid-market merchants use more software products, which translates into great profitability for Block.
On the other side of the business, the Cash App allows users to deposit, spend, send, and invest money, and file taxes, from a single platform. Additionally, by integrating the Afterpay Shop Directory into the digital wallet, Block aims to make the Cash App a commerce discovery tool, potentially unlocking synergies with its Square ecosystem.
From a financial perspective, Block is growing at a good clip. In the past year, gross profit climbed 50% to $4.8 billion and the fintech company generated $965 million in free cash flow, up from a loss of $344 million in the previous year. More importantly, shareholders have reason to believe that momentum will persist in the coming years.
Currently, Block puts its total addressable market (TAM) in the U.S. at $190 billion in gross profit, meaning the company has captured less than 3% of its TAM. But that figure doesn't even account for its growing presence in Europe or other international markets, meaning its true TAM is even larger.
With that in mind, shares trade at 2.2 times sales, near their cheapest valuation in the past two years. That's why it's time to add this growth stock to your portfolio.
2. Cloudflare
Cloudflare is disrupting the cloud computing industry. Its portfolio includes network, application, and zero-trust security services, which collectively accelerate and protect corporate IT infrastructure while eliminating the cost and complexity of on-premise solutions. Cloudflare also offers tools for application and website development.
The cloud industry is dominated by larger vendors like Amazon, but Cloudflare has managed to distinguish itself. Its global network interconnects with 10,500 other networks -- including internet service providers, large enterprises, and other cloud vendors -- and it sits within 50 milliseconds of 95% of internet users worldwide. That means its platform is very fast. In fact, internal studies have shown that Cloudflare consistently outperforms other edge clouds like Fastly, as well as public clouds like Amazon and Alphabet's Google.
Additionally, Cloudflare is infrastructure-agnostic. Its platform integrates with private data centers, public clouds, and multi-cloud environments, allowing businesses to accelerate performance and enforce consistent security policies across their entire network infrastructure. That distinguishes Cloudflare from legacy vendors, which tend to favor their own infrastructure and services.
Cloudflare saw its customer base jump 29% to 154,000 in the past year, and the average customer spent 27% more. As a result, revenue soared 53% to $730 billion, though the company generated only $6 million in cash from operations. That paltry cash flow may concern some investors, but management intends to run the business at breakeven for the foreseeable future. Cloudflare has captured less than 1% of its $115 billion addressable market, so it makes sense to invest aggressively in grabbing market share.
On that note, the company recently announced D1 database, a new addition to its developer platform that will allow clients to build applications on Cloudflare's network without provisioning database services from a third party. To that end, management expects D1 to "quickly become one of the largest databases in the world." That type of innovation should give investors confidence that Cloudflare is making the right decision by investing aggressively in growth.
Currently, shares trade at 22.4 times sales, near its cheapest valuation in the last two years. That's why it's time to buy this monster growth stock.
