Growth stocks are looking very mortal right now. This category of equities led the charge during an impressive bull market that lasted through much of the 2010s, but it now looks to be falling out of favor with investors. The recent sell-off and accompanying economic headwinds (such as inflation) haven't been pretty, but many companies are increasingly looking like bargains at current prices, especially considering their long-term potential.
Block (SQ 5.04%) and Fiverr International (FVRR 4.07%) are two brilliant examples in the tech industry. Here's why these stocks are worth holding onto for the next decade.
1. Block
Block was formerly known as Square, but it changed its name partly to reflect its focus on its broad business that goes beyond the services it offers to small and medium-sized companies that made it famous. Block is still providing point-of-sales systems and accompanying software to entrepreneurs. Through its Square ecosystem, it offers a wide array of other services, including payroll, e-commerce solutions, loans, and more, all to help businesses thrive.
But Block's peer-to-peer payment app, Cash App, has grown in importance as it has become almost a direct competitor to traditional banks in many respects. Cash App offers users the ability to buy and sell stocks and cryptocurrencies, a debit card, direct deposits, and more. Cash App targets individuals while Square targets sellers and businesses, and both have been successful over the years. Why is Block's stock performing so poorly then?
The company's cryptocurrency ambition is one of the reasons. Before the recent sell-off, cryptos were flying high, and revenue from Bitcoin trade contributed meaningfully to Block's top line. But Bitcoin-related revenue is suffering due to the recent downturn. Block generated $4.40 billion in total revenue during the second quarter, down 6% compared to the year-ago period. Excluding Bitcoin, the company's revenue jumped by 34% year over year to $2.62 billion.
Furthermore, Block is not consistently profitable yet, which is also impacting stock performance, especially in a highly volatile period such as this one. The company's net loss in Q2 came in at $208 million, compared to the net income of $204 million reported during the year-ago period. With that said, there are excellent reasons to be bullish on Block. The company is looking to disrupt the financial services sector and has made solid progress in that regard.
Cash App ended June with 47 million monthly transacting accounts, an increase of 7 million compared to June of 2021. The app is gaining increased engagement thanks to the various services Block is adding, including a relatively new feature called Round Ups, which allows Cash App debit card users to invest spare change into stocks or cryptos of their choice. Within its Square ecosystem, the recent addition of buy-now-pay-later features is also helping drive greater engagement and business activity.
Despite overall revenue dropping in Q2, Block's gross profit increased by 29% year over year to $1.47 billion. Block still has plenty of opportunities to tap into in the expanding fintech industry. As it has built a leadership position, it is a great company to buy to profit from this significant long-term opportunity. With its shares down by almost 68% in the trailing-12-month period, now looks like a great time to initiate a position.
2. Fiverr International
Fiverr runs a platform that helps connect freelancers with businesses that seek their services. The company's future is tied to the gig economy, which was booming amid the worst of the pandemic. It's no wonder that Fiverr has lost some steam lately like many other so-called "pandemic stocks." And, of course, economic problems aren't helping either.
Decreasing revenue-growth rates coupled with red ink on the bottom line is a bad combination in any environment, never mind one marked with high inflation, supply chain issues, and geopolitical tensions. During Q2, Fiverr's revenue increased by 13% year over year to $85 million. The company's active buyers increased by 6% year over year to 4.2 million, while spending per buyer jumped to $259, 14% higher than the year-ago period.
Fiverr reported a net loss of $41.9 million, compared to the net loss of $13.3 million reported during the previous fiscal year's Q2.
Despite the issues it faces, here's one thing to remember about Fiverr: The company's platform benefits from the network effect. Freelancers and the businesses looking for them benefit from more of each joining the network, which renders Fiverr's platform more attractive and valuable in the long run. The company does face some competition in this industry, but building a moat from sources like the network effect is a great way to succeed in business.
And there is plenty of room left for the company to grow. Businesses benefit from turning to freelancers as doing so is cheaper and faster than onboarding a new employee, not to mention it comes with fewer legal headaches. Fiverr sees a $247 billion addressable market ahead, and that's in the U.S. alone. The opportunity worldwide is likely to be substantially more massive. That's why Fiverr's prospects still look bright. And it is why it can deliver solid returns in the next decade despite its recent woes on the stock market.
