The stock market can be volatile, especially in the short term. But over time, companies that continue to deliver solid financial results are rewarded, along with their shareholders. This is why it is beneficial to invest in stocks that can be traded for less than their intrinsic value. Let’s consider two stocks that are currently priced at just a fraction of what Wall Street analysts think they are worth: to forbid (NYSE: SQ) And jiggle (NYSE: CHGG).
1. Mass: 95.5% implied rise
Block, the company formerly known as Square, changed its name in December to reflect the fact that it had evolved beyond the business that initially made it famous. Block first came onto the scene and rose to prominence thanks to the suite of products it offered to small and medium-sized sellers and merchants: the ability to turn almost any mobile device into a point of sale system. But now, it provides much more than that, and in particular, it has branched out into Personal Finance and Banking through the Cash App. Block’s traditional seller business and cash app are doing very well.
In the third quarter, the tech giant reported $3.8 billion in total revenue, up 27% from the same period last year. Block reported a total gross profit of $1.1 billion during the quarter, which is a 43% increase year over year. The company’s vendor ecosystem contributed $606 million in gross profit, up 48% from the third quarter of 2020. In addition, Cash App grossed $512 million, up 33% from the prior year quarter.
The block broke even during the quarter, which some investors may be concerned about. In fact, the company hasn’t been consistently profitable, but it’s fair to overlook the occasional red ink to a minimum given its long-term prospects. This is because as finance and banking become more digital, Block has already positioned itself to be an industry leader while competing almost squarely with traditional brick-and-mortar banking.
Block now offers a list of services including direct deposit, debit cards, and the ability to buy stocks and cryptocurrency. The company recently began offering these services to teens, with parental guidance, of course. As Block argues: “Historically, teens have experienced a lack of financial services because they do not have broad access to financial services, and both parents and teens have expressed a desire for these types of products.”
Block’s Cash alone has huge growth potential in the fast-growing fintech industry. The combined opportunities for the company throughout its range of services are enormous. This is why despite the poor performance of the market last year, the average price target for the Block is $285.88 – according to Yahoo! Financing – within the company’s reach.
2. Chegg: 75.8% implied rise
In early November, shares of learning platform Chegg fell nearly 50% in a single day. Investors were not satisfied with the company’s third-quarter financial results and the guidance it issued for the fourth quarter. Chegg is another one of those companies that benefited from the shift to online activities at the height of the pandemic. But in the past year, the company has experienced a major slowdown due to a combination of factors — which have led to fewer students enrolling in Chegg’s services.
In the third quarter, Chegg reported revenue of $171.9 million, which is a 12% increase year-over-year. That’s well below the kind of quarterly growth the company has historically had. While the headwinds the company is facing are real, it believes they are temporary, which is why management approved a $1 billion share buyback program in November.
This move shows Chegg’s confidence in her own business, and in my opinion, that confidence is justified. Chegg had 4.4 million subscribers to its Chegg services in the third quarter, up 17% from the same period last year.
The company thrives on its ability to provide specialized solutions to questions and textbook problems for these subscribers. The more students who join the platform, the more subject matter experts are drawn to answer complex questions, and the more questions answered, the more students looking for these types of services will join the platform.
This is known as the network effect – when the value of a product increases as more people use it. According to management, Chegg had 70 million unique questions in its database as of the third quarter. This is the company’s weapon to attract more students to its platform in the coming years, and there is still great growth potential. The company estimates that 102 million students worldwide can benefit from its services.
This gives Chegg plenty of room to increase its user base, revenue, and profits. That will help justify the confidence both management and Wall Street — the company’s average target price is $51.50 — have in the business.
A word about evaluation
It could be argued that the correction was long overdue for Chegg and Block, both of whom were trading with crazy ratings. Looking at the price-to-sales (P/S) ratio of each company, both look more attractive now. Chegg’s P/S ratio is currently 5.1 – about as low as it was over a year ago.
Meanwhile, Block’s forward P/L is at 3.7, which is also near a 52-week low. These numbers are more than fair for companies with a potential Chegg and Block type. Wall Street isn’t always right, but its expectations are justified when it comes to these two tech stocks.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of the Motley Fool Premium Consulting Service. We are diverse! Asking about an investment thesis — even if it’s our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.