Many growth stocks got hammered last year as investors turned bearish in response to runaway inflation and rising interest rates. But some of these beaten-down stocks are on the rebound this year. For instance, shares of Block (XYZ -3.52%) and Atlassian (TEAM -2.93%) have climbed 15% and 14%, respectively, so far in 2023.
Better yet, analysts see more upside for both stocks in the coming months. In fact, according to The Wall Street Journal, Block carries an average price target of $91.31 per share, which implies a 27% upside from its current price. Meanwhile, Atlassian carries an average price target of $192 per share, which implies a 31% upside from its current price. Is it time to buy these growth stocks?
Here's what investors should know.
1. Block: Building momentum with Square and Cash App
Block offers financial services to merchants and consumers through two product ecosystems: Square and Cash App. Square comprises an integrated suite of hardware, software, and banking services that help merchants grow their businesses across online and offline locations. Similarly, Cash App is a digital wallet that allows consumers to send, spend, borrow, and invest money.
In the third quarter, Block reported strong results in both ecosystems. Square's gross profit climbed 29% to $783 million, driven by upmarket and geographic expansion, two key elements of the company's growth strategy. Mid-market sellers (i.e., those with more than $500,000 in annual sales) accounted for 40% of gross payment volume in the third quarter, up from 37% in the same period last year. Similarly, international sellers accounted for 15% of gross profit, up from 9% last year.
Meanwhile, Cash App's gross profit increased 51% to $774 million, as monthly active users rose 20% to 49 million. But management provided another exciting metric: Cash App Card users climbed over 40% to 18 million, meaning consumers are adopting adjacent services that allow Block to monetize the platform more efficiently. Better yet, the company is well positioned to maintain that momentum in the coming quarters. Cash App was the most downloaded digital wallet in the U.S. in 2022, according to Apptopia, and Block hopes to drive even greater adoption by transforming the digital wallet into a commerce platform.
Specifically, Block is working to infuse discovery, shopping, and lead generation capabilities into the Cash App, meaning users will soon be able to make purchases from Afterpay and Cash App Pay sellers without leaving the digital wallet. That could create a powerful network effect that brings more consumers to the platform, thereby incentivizing more businesses to accept Afterpay and Cash App Pay, and so on. Also, by transforming the Cash App into a commerce platform, Block will be able to monetize the Cash App with digital ads, much like Amazon monetizes its marketplace with product recommendations.
On that note, Block estimates its total addressable market (TAM) at $190 billion in gross profit, comprising $120 billion from Square and $70 billion from Cash App. For context, Block reported a gross profit of $5.5 billion over the past year, meaning it has captured less than 3% of its TAM. And with shares trading at 2.3 times sales, a significant discount to the three-year average of 7 times sales, investors should seriously consider buying this growth stock today.
There is one caveat: Block is best viewed as a long-term investment. Price targets set by Wall Street analysts are subject to change, and they amount to nothing more than glorified guesswork. In other words, there is no guarantee Block will produce a position return this year.
2. Atlassian: A leader in team collaboration and productivity software
Atlassian specializes in team collaboration and productivity. Its software portfolio includes products for work management, IT service management, and enterprise planning, all built on a single platform. That means customers can access all the tools they need to plan, track, and manage projects from a single location, which reduces cost and complexity compared to implementing a patchwork of disparate products.
Atlassian has a somewhat unique go-to-market strategy. The company relies heavily on word-of-mouth marketing and self-service sales channels rather than traditional direct sales and marketing teams. That unique go-to-market strategy allows the company to outspend the competition on product development.
That advantage has helped Atlassian earn a leadership position in several software end markets, including product management, knowledge management, and enterprise service management software. Better yet, Atlassian ranked as the seventh best software seller in the world in 2022, according to research company G2. That prestigious placement is based on its strong market presence and high user satisfaction scores.
Financial growth has slowed as businesses have scrutinized spending decisions more closely amid the challenging economic environment, but Atlassian still reported respectable results in the most recent quarter. Revenue increased 31% to $807 million, and free cash flow climbed 31% to $76 million. On a more somber note, management mentioned that free users are converting paying customers more slowly, which means growth may decelerate in the near term. But patient investors still have good reason to be bullish in the long run.
Atlassian says its $29 billion TAM is growing at 14% annually, and given its strong presence in multiple software markets, that tailwind leads to consistent growth for years to come, especially when the economic climate improves. In the meantime, the stock trades at 12.4 times sales, a bargain compared to its three-year average of 28.4 times sales. At that price, it's worth buying a few shares today, but only for investors that are prepared to hold the stock for at least three to five years.
