One of the basic principles of investing in stocks is to "buy low." That is a lot easier to do when equity markets are going through a downturn, like the one we experienced in 2022. Plenty of attractive stocks are trading at much lower levels than just a year ago, but that won't last forever.
Eventually, the market will bounce back, a bull market will follow, and equities will become more expensive. Let's consider two growth stocks to buy before that happens: Block (SQ +4.36%) and Fiverr (FVRR +1.93%). These tech stocks have plenty of fuel left in the growth tank.
NYSE: SQ
Key Data Points
1. Block
Block is a fintech giant seeking to democratize businesses' and individuals' finances. It targets the former through its Square ecosystem, where it offers a range of products of services from point-of-sales systems to inventory and payroll. Block's Cash App, a peer-to-peer payment app, is another key part of its business that offers individuals various banking services, from stock and crypto investing to direct deposit and a debit card.
As of September, Cash App had 49 million monthly active users, an increase of 20% year over year. Block reports that the percentage of those users who are adopting various services continues to grow rapidly. For instance, 36% had Cash App cards, compared to 29% in September 2021 and 25% in September 2020. That means the adoption of Block's Cash App card is growing even more rapidly than the app's monthly users.
This highlights one of the strengths of Block's business. Since it offers services that complement one another, its customers will often sign up for more of these solutions over time, even when initially drawn to the platform in search of one specific offering. And there is plenty more room to grow within the company's core ecosystems. In the third quarter, Block recorded a gross profit of $1.57 billion, 38% higher than the year-ago period.
The company sees a total addressable market (TAM) of $70 billion for its Cash App ecosystem, while that of its Square platform stands at $120 billion. Block has proven it can attract more clients onto its platform, offer more services for them to sign up for, and drive adoption and revenue growth that way. Naturally, there are some risks, especially those related to the fintech specialist's reliance on Bitcoin transactions, which aren't very profitable.
Cryptocurrencies dropped in value this year, and they will likely remain volatile moving forward. Block's crypto ambitions partly account for its lagging the market this year. Block looks to be on a solid path, even with that as a caveat. Targeting under-banked communities or others that could benefit from Cash App and small and medium-sized businesses has proved highly profitable.
But it still has plenty of room to expand within both populations, which should continue to fuel the company's revenue and gross profit growth. The next bull market won't leave this excellent fintech stock behind.
NYSE: FVRR
Key Data Points
2. Fiverr
Fiverr is a platform that connects freelancers with businesses (or sometimes individuals) seeking their services. Advertising one's body of work and attracting customers isn't easy to do as a freelancer, but Fiverr's website makes the task easier. It is also a convenient place for companies who do not have to post ads on various websites to find potential contractors. In other words, it's a win-win.
Fiverr generates money through transaction fees. The company's revenue and earnings can grow as the gig economy expands, something that happened before and during the pandemic and will continue long after. According to some estimates, the gig economy grew about 15 times faster than the traditional job market between 2010 and 2020. Fiverr estimates a TAM of $247 billion, and that's only in the U.S.
In the third quarter, the company reported total revenue of $82.5 million -- growing 11% year over year -- and a drop in the bucket compared to its TAM. While Fiverr does have plenty of competition, one reason it can be one of the winners in the long run in this space is that the more freelancers on the platform, the more companies will gravitate toward it in search of talent, and vice versa.
Or in other words, the value of the company's platform increases as more people join it, also known as the network effect. This dynamic implies that Fiverr can continue attracting users, which can drive the company's top- and bottom-line growth. It is true that Fiverr remains unprofitable. Its net loss in the third quarter came in at $11.4 million, slightly better than the net loss of $14.3 million from the third quarter of 2021.
Further, the company's growth has slowed since its pandemic peak.
None of these issues should scare investors away. Year-over-year comparisons were always going to be difficult after the gig economy soared amid the worst of the pandemic. The most important takeaway is that Fiverr is still in the early innings of its growth arc, which means it's too early to discount its stock after a lousy year. Those with the patience to hang on to the company's shares over the long run should be rewarded.
