- Nasdaq up 12.6% from its October 13 bear-market low
- High-growth tech stocks have staged impressive recoveries
- Buy Block and Splunk as inflation fears recede and Fed pivot hopes increase
The Nasdaq Composite has staged a notable rebound since falling to its weakest level since July 2020 last month. The tech-heavy index is now up more than 12% from its mid-October lows, increasing confidence the sector has bottomed following its year-long selloff.
The recent rally has been fueled by signs that inflation may have peaked, raising hopes the Federal Reserve will become less aggressive on interest rate hikes.
Taking that into account, I believe Square-parent Block (NYSE:SQ) and cloud software specialist Splunk (NASDAQ:SPLK) are both in prime position to see their respective stocks extend their recovery in the months ahead. Both tech companies still have plenty of room to grow their respective businesses, making them solid long-term investments with strong future growth prospects.
Block
- Year-To-Date Performance: -54.6%
- Percentage From ATH: -74.6%
- Market Cap: $43.9 billion
Block has enjoyed a strong rebound since seeing its stock drop to the lowest level since April 2020 on Nov. 3, running about 20% higher so far this month. However, shares of the San Francisco, California-based financial-technology company remain down 54.6% year-to-date (ytd).
Trading roughly 75% below its August 2021 all-time high, investors should consider adding Block to their portfolios amid strong momentum in its booming Cash App and Square seller businesses.
The mobile payment specialist run by former Twitter CEO Jack Dorsey delivered third-quarter earnings and revenue which blew past consensus expectations earlier this month, despite the challenging macro environment.
Block reported $774 million in gross profit for its Cash App business and $783 million in gross profit for its Square merchants business, up 51% and 29% respectively on an annualized basis. In total, the company posted Q3 gross profit of $1.57 billion, rising 38% year-over-year (yoy).
The fintech powerhouse said it had its highest quarterly cash inflow on record, meaning more users are depositing money into their Cash App accounts. The app now has 49 million monthly active users (MAUs), up 22.5% yoy.
Dorsey said in a letter to shareholders that the company showed strong growth, even as other payment firms warned about looming slowdowns due to ongoing macroeconomic headwinds.
Not surprisingly, Wall Street has a long-term bullish view on SQ stock, with 41 out of 44 analysts surveyed by Investing.com rating it as either ‘buy’ or ‘hold’.
The average fair value for Block’s stock on InvestingPro implies a 25.5% upside.
Considering the Square-owner’s leading position in the mobile payment processing industry, I think Block could finally see shares bottom following a brutal selloff which has seen it lose more than half its market value in 2022.
Splunk
- Year-To-Date Performance: -26.5%
- Percentage From ATH: -62.3%
- Market Cap: $13.8 billion
Splunk has seen its stock drop 26.5% this year as the data analytics software company fell out of favor with investors. But the shares have rebounded significantly since falling to a 52-week trough of $65 in mid-October, rising nearly 31% in the past month. At current levels, the San Francisco, California-based software firm is still about 62% away from its September 2020 record peak.
Splunk is poised to extend its recovery in the months ahead due to favorable business trends as it completes its transition from a perpetual license to a software-as-a-service subscription-based model. The switch to a SaaS business model will likely see the company generate higher annual recurring revenue, greater profitability, and improved free cash flow in the quarters ahead.
All 41 analysts surveyed by Investing.com rate the stock a ‘buy’ or ‘neutral’.
The quantitative models in InvestingPro point to a gain of 32.8% over the next 12 months.
Splunk reports third-quarter financial results after the U.S. market closes on Wednesday, Nov. 30. Consensus calls for EPS of $0.25, improving significantly from a loss of $0.37 last year, while revenue is expected to climb 27.5% yoy.
Wall Street analysts are extremely optimistic ahead of the report according to InvestingPro with analysts raising their EPS estimates 32 times in the past 90 days to reflect a whopping increase of +182.7% from their initial expectations.
Activist investor Starboard Value, which often targets underperforming software companies, revealed a near-5% stake in Splunk last month. "We think there's significant upside at Splunk," Starboard CEO Jeffrey Smith said, noting the company could boost free cash flow margins and maintain a strong growth profile that could allow Splunk to generate $8-to-$9 of free cash flow per share by 2025.
Smith added that Splunk's business made it highly attractive as a potential takeover candidate. Adding:
"This dynamic creates multiple ways to win and makes the investment in Splunk even more interesting."
In February, Splunk was valued at $18.4 billion and the Wall Street Journal reported that Cisco (NASDAQ:CSCO) made an offer of more than $20 billion to acquire the company, however talks broke down.
Disclosure: At the time of writing, Jesse is long on the Dow Jones Industrial Average and the S&P 500 via the SPDR Dow ETF and the SPDR S&P 500 ETF. He is also long on the Energy Select Sector SPDR ETF. The views discussed in this article are solely the opinion of the author and should not be taken as investment advice.