The decline seen in many US equity stocks may be far from over. The tech-heavy Nasdaq Composite is down by over 27% so far this year. Many analysts are concerned about the various structural challenges plaging the global economy. The recent 0.75% jump in the benchmark federal funds interest rate amid steep inflation and the very real possibility of an upcoming recession, supply chain challenges, and geopolitical tensions all are expected to continue exerting downward pressure on several stocks in 2022.
So far this year, the technology sector has been one of the most affected. Global tech stocks are expected to report the highest annual decline in the past 14 years in 2022. However, there are some high-growth tech stocks that are being unduly punished by the overall bearish sentiment, despite solid fundamentals.
Against this backdrop, here’s why investors may benefit from buying Microsoft (MSFT 1.28%) and Block (SQ -2.64%) in the current Nasdaq bear market.
Share prices of tech giant Microsoft are down by around 21% so far this year. Besides difficult macros, the company’s lowered fourth-quarter fiscal (ending June 30, 2021) revenue guidance amid unfavorable foreign currency fluctuations is also not helping investor sentiment. However, considering the company’s solid growth prospects, the extent of the pullback in share prices seems largely unjustified.
Wildly popular for its Microsoft Office and Windows products, Microsoft has also become a dominant player in the cloud services and gaming segments, two businesses with the potential to withstand recessionary pressures. The highly profitable Microsoft Azure cloud business accounted for a 22% share of the global cloud infrastructure market in the first quarter of 2022, behind Amazon’s AWS’s 33% market share.
In the third quarter of fiscal 2022 (ending March 31, 2022), Azure and other cloud services clocked year-over-year revenue growth of 46%. Global end-user spending on public cloud services is expected to grow from $410.9 billion in 2021 to $600 billion in 2023, according to Gartner. Hence, Azure is expected to continue growing at a rapid clip in the coming quarters.
Microsoft is also focusing on leveraging the many growth opportunities in the gaming business. The pending acquisition of Activision Blizzard and subsequent addition of titles such as Candy Crush and Call of Duty Mobile have strengthened the company’s position in the mobile gaming space. The deal is also expected to bolster Microsoft’s subscription gaming service, Game Pass.
Microsoft’s shift from a mostly perpetual license-based business model to a subscription-based sales model has added significantly to the company’s revenue visibility. Coupled with total cash reserves of over $100 billion, the company seems well poised to weather a probable recession in the coming months.
Previously known as Square, fintech disruptor Block’s shares have tanked by 60% so far this year. However, this fall can be mostly attributed to negative market sentiment rather than weak company fundamentals.
Block missed its consensus revenue and earnings estimates in the first quarter, mainly due to around a 50% year-over-year decline in the company’s Bitcoin revenues. The company allows investors to trade only in one cryptocurrency (Bitcoin). The drop in Bitcoin prices affected the number of Bitcoin transactions on the platform.
However, excluding the Bitcoin business, the company’s two-sided square ecosystem — an integrated suite of hardware, software, and financial services products sold to small- and medium-sized businesses and a peer-to-peer mobile payments platform, Cash App — has demonstrated strength even in these difficult times.
In March, Cash App reported 21 times higher transaction activity from its monthly active member base compared to the average, driven by solid adoption of the company’s banking products. Cash App also reported the highest quarterly inflows ever in the first quarter.
Block is selling to mid-market sellers, which are more likely to use the company’s financial products. The addition of contactless payment service available on Apple iPhones in the Square Point-of-Sales app will further prove to be a big value addition to the seller community.
Finally, the recent acquisition of buy-now-pay-later (BNPL) player AfterPay, although not yet a profitable move, can prove to be a robust growth avenue for the company in coming years.
Despite the many pros, Block’s shares are trading at 2.1 times forward sales, the lowest since January 2021. All this means retail investors should consider adding this stock to their portfolio in July 2022.