2 Growth Stocks With Massive Potential

Growth Stocks With Massive Potential: 2022 has been famously hard on high-growth technology stocks.
 
Investors who bought these stocks at astronomical multiples in late 2020 and 2021 have taken large losses, but the drop may have created new opportunities for those who previously avoided overvalued tech companies.
 
Here are two growth stocks that have seen large losses in 2022 but may still hold massive potential for long-term returns.
 

Fiverr

Freelance service marketplace Fiverr (NYSE:FVRR) has taken a substantial hit this year, losing about two-thirds of its value YTD. The company, however, continues to be a good long-term prospect as a major platform for buying and selling professional services online.
 
In Q2, Fiverr’s revenue increased by 13 percent year-over-year. While this growth rate is far from stellar, the company’s earnings report noted that this growth came at a time when small and medium-sized businesses were spending much more cautiously.
 
The number of buyers on the Fiverr platform grew 6 percent to 4.2 million, and spending per buyer increased 14 percent.

Fiverr’s gross margin did slide from 83.4 percent in Q2 2021 to 79.4 percent in 2022. Despite receding, this margin rate is still quite favorable. Net losses were more troubling, advancing from $0.37 per share last year to $1.13 per share in the most recent quarter.
 
On the surface, the company’s debt load appears to be concerning. Fiverr’s current debt-to-equity ratio is 1.94, well above a conservative range.
 
This issue, however, is offset by the 0 percent interest rate on its debts over the coming four years. Fiverr’s debts are still high, but the company should be less susceptible to the effects of variable interest rates than many others.

Although the company is facing some challenges, Fiverr’s future growth prospects look quite strong.
 
Ongoing growth in the buyer base and the amount of spending per buyer should both support higher future revenues, eventually leading to improved earnings. Management is also working to streamline expenses in an effort to turn the company’s losses around.
 
Fiverr is continuing to improve its platform, making it more useful for large and ongoing projects. The platform was originally used for small, one-off projects with extremely low prices. Today, freelancers can price their projects at up to $20,000.
 
Fiverr has also rolled out subscription features for recurring work. Both of these developments are gradually helping the company stand out as a premier platform for businesses to find skilled freelance workers.
 
In the short term, the stock’s movements look somewhat uncertain. The median analyst price target for Fiverr is $50, giving it a projected upside of 36.2 percent over the current price of $36.71.
 
However, the stock also appears to be somewhat overvalued at its current price. At 67.9 times forward earnings and 4.1 times sales, the stock doesn’t look cheap at today’s prices. As such, substantial growth already appears to be factored into the stock’s pricing.
 
In spite of a few weaknesses, Fiverr still appears to be a strong play on the growth of the digital freelance marketplace. The platform’s pivot toward larger projects and ongoing customer base growth are both very favorable for investors.
 
As the market for digital services continues to grow, there’s good reason to believe that Fiverr will prosper and produce generous long-term returns for its investors.
 

Block

Formerly known as Square, Block (NYSE:SQ) has suffered similar losses to many other fintech companies this year. More than half of the stock’s value has been erased in 2022, creating a potential buying opportunity for investors looking to take advantage of new financial technologies.
 
Although it has lost more than half of its value in 2022, Block continues to deliver surprisingly strong results. In Q2, the company reported gross profit of $1.47 billion, 29 percent higher than the previous year.
 
The company still reported net losses of $0.19 per share. This was a slight beat, as analysts had expected a loss of $0.20 per share.

Temporary losses notwithstanding, Block still looks very attractive as a growth company. Its basic payment processing business, Square, continued to grow at a respectable rate and delivered $755 million in gross profits in Q2.
 
The recent acquisition of Afterpay also gives Block a presence in the lucrative buy now, pay later fintech space. This allows Block to compete with the likes of Affirm, Apple and PayPal as customers look for installment options on larger purchases.
 
Block is also expanding its financial services presence by extending small loans to customers. The Borrow feature on Cash App has improved revenue while allowing customers to access installment loans of up to $200.
 
Block’s risk management for Borrow has been extremely effective, allowing it to make these loans with minimal concern of losses.

In terms of value, Block still isn’t cheap. The stock trades at more than 80 times forward earnings, even after its losses so far this year. The price-to-sales ratio, however, is a bit more reasonable at 2.65.
 
One very attractive metric for Block is its debt-to-equity ratio, which stands at a safe 0.24. So, while Block may be somewhat overvalued, it appears that the company is quite stable from a debt perspective.
 
Block’s price target suggests even more upside than Fiverr. The median 12-month price based on 38 analyst forecasts is $113.50, a gain of 52.6 percent from the current price of $74.39.
 
It’s worth noting that none of those 38 forecasts anticipate Block losing ground over the coming year. Even the lowest price target projects that the stock will remain largely flat at $75.
 
Block appears to be one of the better fintech growth bets on the market today. The company has the advantage of still having plenty of room to expand while already being an established and widely-used service. As such, it offers a good balance between growth potential and safety.
 
As Block continues to expand its suite of personal finance offerings, investors will likely see solid returns over the next several years.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.