Jhe US stock market has been in shock for several months. Rising inflation, rising interest rates, escalating geopolitical tensions and COVID-19 lockdowns abroad continue to weigh on market sentiment.
However, these tough times have also created buying opportunities for patient investors. Despite strong fundamentals and a robust sector outlook, growth stocks like Block (NYSE:SQ) and Unit Software (NYSE:U) are currently trading at attractive valuations.
Here’s why these two stocks have a good chance of withstanding any recession and should prove to be promising picks in April.
Block (formerly known as Square) operates an integrated fintech ecosystem comprising two main parts: the consumer-focused Cash App platform and a seller-focused Square platform. Cash App is a one-stop mobile application that allows individuals to perform various quasi-banking activities, such as sending, receiving or investing money, free debit card services, peer-to-peer payments and tax payment services.
Block’s Square ecosystem offers a range of merchant services, such as point-of-sale, payroll, payment processing, marketing, social media management, and custom app development. Square also operates a global music and entertainment platform called TIDAL and a development platform to access Bitcoin and blockchain technologies without institutional intermediaries.
With Block positioned as a one-stop-shop for most of its customers’ personal financial needs and the trading infrastructure needs of its sellers, it becomes costly and less necessary for customers to switch to other platforms. Block’s Square and Cash App also benefit from strong network effects as an increasing number of users leads to the generation of more data and insights. These, in turn, can be leveraged to make platforms even more efficient and convenient for users.
Block’s network effects also rely on tight integration of its two-sided platform. Sellers are increasingly opting for the Square platform to take advantage of Cash App’s growing customer base. And customers are increasingly using Cash App to benefit from the seamless shopping experience offered by merchants using the Square platform.
According to Apptopia, Cash App is currently the eighth most downloaded app on the iOS platform and the fourth most downloaded app on the Android platform in the United States. In December 2021, the app reported 44 million monthly active users, a year-on-year jump of 22%. While the customer acquisition cost (CAC) per customer for Cash App has increased from $5 to $10 in 2021, it is still lower than that required by online banks or traditional banks. Additionally, despite the CAC doubling in 2021, the payback period for the early 2021 customer cohorts is less than a year.
In fiscal 2021, Block also reported growing adoption of its Square platform products by more complex sellers. These sellers also generated 10 times more profit than those generated by those who only have one product. The improved customer mix may prove to be a strong benefit to Block’s margins in years to come.
Despite the many upsides, Block’s share price is currently down more than 33% year-to-date.
With stocks now trading at 3.2 times forward sales – almost at the bottom of their historical range – this exaggerated pullback may prove to be an attractive entry point for retail investors.
2. Unity Software
Unity Software is a pick-and-shovel player currently primarily focused on the gaming industry. The company provides tools that enable game developers and publishers to create 2D and 3D mobile and console games in time. and monetize them effectively through ad revenue and in-app purchases. Additionally, the company offers targeted advertising services to advertisers, made possible by leveraging data collected from 22.9 billion monthly global ad impressions delivered to approximately 2 billion monthly active users worldwide.
Unity’s game engine (a framework of tools used to create games) accounted for nearly 48% of the global game engine market in March 2021. The company is well positioned to benefit from the rapidly expanding global market gaming — estimated to grow from $184.6 billion in 2021 to $314.8 billion in 2027.
Apart from games, Unity is also focused on leveraging its tools in other areas. The company has built a solid presence in the development of virtual reality and augmented reality, technologies increasingly used for simulation, training and robotics. The recent acquisition of Weta Digital has further added highly sophisticated visual effects (VFX) tools to its portfolio. When integrated with the Unity platform, these tools can enable the creation of next-generation real-time 3D games and help build the metaverse.
Unity’s revenue momentum has kept pace with its operational growth. Analysts estimate Unity’s revenue to grow year-over-year by 34.9% in fiscal 2022 and 29% in 2023. Although not yet profitable, the company is showing a strong balance sheet with cash of $1.74 billion and total debt of $1.82 billion at year-end. financial year 2021.
Unity is currently trading at 15.2x forwards, which is at the lower end of its historical range. Additionally, the company’s $1.1 billion in fiscal 2021 revenue was only about 2% of its estimated $45 billion addressable market. Against the backdrop of significant growth potential, a strong value proposition and an attractive valuation, I’m fairly bullish on this stock.
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Manali Bhade has no position in the stocks mentioned. The Motley Fool owns and endorses Bitcoin, Block, Inc. and Unity Software Inc. The Motley Fool has a Disclosure Policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.