The past year has been difficult for investors. The wide base S&P500 posted its worst first-half performance in more than five decades, and the benchmark has now fallen for three consecutive quarters. Meanwhile, heavy tech Nasdaq Compound slipped into its worst bear market in a decade.
These losses have left big dent in many portfolios, but savvy investors know that downturns are buying opportunities. Here are two spectacular growth stocks to buy now and hold forever.
Block: a disruptive fintech
To block (SQ 4.43%) is the fintech company behind the Square and Cash App brands, both of which have been disruptive forces in their respective industries. The Square ecosystem includes a suite of hardware, software, and banking services that simplify commerce. These solutions integrate seamlessly, unlike the bundled products offered by traditional merchant service providers.
Similarly, Cash App is a digital wallet that simplifies consumer finances. It allows users to deposit, borrow, spend, and invest money from a single platform, and it has ranked as the most downloaded mobile finance app in the United States. United in the first half of 2022, in the lead PayPal and Venmo. Even better, Block recently added a discovery feature to the Cash App that allows consumers to browse and purchase products from sellers who accept Afterpay or Cash App Pay. This strategy could boost adoption.
Despite a difficult economic climate, Block posted impressive financial results in the third quarter. Cash App’s gross profit soared 51% to $774 million, while Square’s gross profit soared 29% to $783 million. Collectively, total gross profit rose 38% to $1.6 billion and non-GAAP earnings climbed 68% to $0.42 per diluted share. More importantly, shareholders have good reason to be optimistic about the future. Block estimates its addressable market at $190 billion in gross profit, and its ambitious growth strategy should continue to drive market share gains.
Specifically, the continued addition of commerce functionality to the Cash App should bring more users to the digital wallet, which should encourage more businesses to accept Afterpay and Cash App Pay. Meanwhile, Block is successfully moving upscale and expanding into new geographies as more middle-market sellers (i.e., those with over $500,000 in annual sales) and international sellers continued to adopt Square products in the third quarter.
Shares are currently trading at 2.3 times sales, a notable reduction from the three-year average of 7.3 times sales. With that in mind, investors might regret not buying that growth on the downside.
Arista Networks: A Leader in Broadband Networking
Arista Networks (A NET 1.10%) provides high performance networking equipment to data centers. Its core innovation is the Extensible Operating System (EOS), the single software that powers its entire portfolio of switching and routing hardware. This single software product approach is fundamentally different from that of traditional vendors who use multiple operating systems, making network management more complex and costly.
In a nutshell, Arista enables enterprises to integrate their IT ecosystems – from public and private clouds to wired and wireless campus workspaces – into seamless networks running a single operating system. Additionally, Arista’s networking platforms deliver industry-leading performance, and the company has built a reputation for world-class customer support, as evidenced by its Net Promoter Score of 80.
These advantages have propelled the company to the forefront of the networking industry. In fact, Arista has a 41.5% market share in high-speed data center switches, while second place Cisco Systems holds only 22.5% market share. This dominance was once again reflected in strong financial results in the third quarter. Revenue soared 57% to $1.4 billion and GAAP earnings jumped 61% to $1.13 per diluted share.
Going forward, investors have good reason to be optimistic. Cloud computing and data-intensive applications (eg, streaming media and artificial intelligence) will continue to strain modern data centers, creating a need for faster networking solutions. Arista – as the market leader in high-speed data center switching – is well positioned to benefit from these trends. With that in mind, management pegs its addressable market at $35 billion by 2025, leaving plenty of room for future growth.
As a caveat, the stock is trading at 10.4x sells, slightly above the three-year average of 10x, but this growth stock is still worth buying for patient investors. .
Trevor Jennewine holds positions at Arista Networks, Block, Inc. and PayPal Holdings. The Motley Fool holds positions and recommends Arista Networks, Block, Inc., Cisco Systems, and PayPal Holdings. The Motley Fool has a disclosure policy.
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