Macroeconomic uncertainty has sparked a serious downturn in the stock market. The broad-based S&P 500 has plunged 24%, but many individual growth stocks have suffered bigger losses. For instance, Alphabet (GOOG 1.47%) (GOOGL 1.37%) and Block (SQ 1.79%) have seen their share prices tumble 33% and 79%, respectively, leaving both stocks near a 52-week low.
Clearly, investors are worried about how high inflation (and a potential recession) might affect both businesses. To be fair, Alphabet may see slower growth as brands cut advertising budgets to account for softness in consumer demand, and Block may struggle as rising prices temper consumer spending. But those headwinds are ultimately temporary, which makes this a buying opportunity.
Here’s what investors should know about Alphabet and Block.
Alphabet: The on-ramp to the internet
Alphabet is a collection of companies, though Google is its best known brand. In fact, Google is the third most valuable brand in the world, according to Brand Finance. Expertise in artificial intelligence and search algorithms has helped the company earn that coveted position. Google Search is essentially the on-ramp to the internet, as it holds more than 90% market share among search engines.
YouTube is also a significant source of brand value for Google. According to Pew Research, 95% of teens use YouTube, making it the most popular social media platform among that age demographic — the next closest competitor is TikTok, which is used by 67% of teens. And in September, YouTube actually surpassed Netflix to become the most popular streaming service as measured by viewing time.
Collectively, those viral web properties have helped Google become the largest advertiser in the world, but the company also has a growing cloud computing business. Google Cloud Platform accounted for 8% of cloud infrastructure spend in second-quarter 2022, up from 6% in Q2 2020, which makes it the third-largest cloud vendor behind Amazon Web Services and Microsoft Azure.
Not surprisingly, Alphabet has delivered solid financial results on a relatively consistent basis. Over the past year, revenue rose 26% to $278 billion and free cash flow climbed 11% to $65 billion. More importantly, the company is well positioned to maintain that momentum in the coming years.
Looking ahead, worldwide digital ad spend is expected to increase at nearly 10% per year to reach $876 billion by 2026, according to eMarketer. Better yet, the cloud computing market will grow at nearly 16% per year to $1.5 trillion by 2030, according to Grand View Research. Those tailwinds should keep Alphabet in growth mode, and with shares trading at 4.9 times sales — a discount to the three-year average of 6.6 times sales — now is a great time to buy this beaten-down growth stock.
Block: Unlocking synergies between Square and Cash App
Block simplifies financial services for businesses and consumers. Its Square ecosystem does away with long-term contracts, offering an integrated suite of hardware, software, and services that help sellers run a business across online and offline locations. That differentiates Block from traditional merchant service providers. For instance, banks typically require long-term contracts, and they usually bundle software and services from different vendors, leaving sellers to deal with complicated integrations.
On the other side of the business, Block’s Cash App ecosystem empowers users to deposit, spend, borrow, and invest money from a single platform. Thanks to that broad utility, the Cash App was the most downloaded digital wallet in the U.S. in the first half of 2022.
Despite macroeconomic headwinds, Block continued to grow at a steady pace over the past year. Gross profit jumped 37% to $5.1 billion, and free cash flow clocked in at $563 million, up 178%. Better yet, investors have good reason to be bullish about this company, as management has outlined a potentially game-changing growth strategy.
Specifically, Block is working to unlock synergies between Square and Cash App by integrating both with Afterpay, its recently acquired buy-now-pay-later platform.
Square sellers can now accept Afterpay in person and online, and Cash App users will soon be able to browse products and make purchases from the Afterpay Shop Directory — a marketplace where more than 140,000 brands can showcase their products — directly within the Cash App. That should boost sales for Afterpay sellers, including Square sellers that accept Afterpay.
Additionally, Block plans to double down on advertising. As the Cash App becomes a commerce platform, Block will be able to use shopper data to deliver targeted ads to Cash App users.
That comes with two benefits. First, Block will collect ad revenue based on clicks or purchases. Second, Block should also benefit as those leads generate more sales for sellers.
On that note, Block puts its addressable market at $190 billion in gross profit, meaning the company has captured less than 3% of its market opportunity. And with the stock near a 52-week low, shares are trading at 1.8 times sales, a significant markdown from the three-year average of 7.4 times sales. That’s why this growth stock is worth buying today.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions in Amazon and Block, Inc. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Block, Inc., Microsoft, and Netflix. The Motley Fool has a disclosure policy.
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