Over the past six months, even though the US’ Nasdaq has risen by around 7%, many tech stocks have taken a beating.
The common refrain is that the shares in the technology companies have risen so much in 2020 and in the early part of 2021 that they are now taking a breather as pandemic-driven restrictions are lifted.
But falling share prices in high-quality companies provide buying opportunities if investors have the long term in mind.
With that, let’s take a look at three US-listed tech stocks that have been beaten down lately, but could become multi-baggers of the future.
Definition of multi-bagger: A multi-bagger is a term created by famed investor Peter Lynch and it refers to a stock that increases by several times its initial purchase price.
Company #1: DocuSign Inc (NASDAQ: DOCU)
DocuSign was formed in 2003 and is a pioneer in e-signature.
Over the past two weeks or so, DocuSign’s shares have plunged more than 30%.
The culprit was DocuSign’s latest earnings release.
For its fiscal third quarter ended 31 October 2021, the company reported that its revenue grew 42% year-over-year to $545 million while operating margin reached 22%, exceeding its expectations. However, DocuSign fell short of its billings guidance.
The company said that as it moved through the quarter and into the second half of the year, it saw demand slowing down.
While it had expected an eventual decrease from the peak levels of growth achieved during the height of the pandemic last year, the environment shifted more quickly than it had anticipated.
That was the main cause of its lower-than-expected billing in the latest quarter. It also tampered its expectations for the fourth quarter.
The muted outlook caused DocuSign’s shares to crash overnight by 42%.
But I believe the stock market is too short-term oriented. Yes, demand would slow down as the world slowly opens up, but that doesn’t mean that the company is doomed for failure, as the market might suggest.
Customers who see the benefits of having their agreements signed and managed digitally won’t go back to paper, as that’s just plain inconvenience.
DocuSign says that the average savings per agreement is US$36 (due to reduced hard costs and improved employee productivity).
Another statistic shows that 82% of agreements are completed in less than a day, and 49% in less than 15 minutes.
Compare that with manual signing of documents, which involves a lot of processes: from printing, to delivering the document to the intended recipient, to signing, and eventually to filing it. What if the recipient stays in another part of the world? We would be looking at a time frame of a few days to weeks or even months.
I don’t think anyone would want to give up on those time-saving benefits just because the pandemic is subsiding and people are beginning to return to the office.
Over the long run, with DocuSign’s growing suite of products and services, there’s no doubt that the company would be able to gain a larger share in its agreements market.
DocuSign projects its total addressable market (TAM) to be around US$50 billion and its last twelve months revenue of around US$2 billion is a minute part of it.
DocuSign’s chief executive Dan Springer said it best during the latest earnings conference call:
“[T]here will be fluctuations from time to time in our business. We haven’t had one in our almost four years as a public company that’s been in any way notable. But with the leadership position we have with having over $50 billion TAM that we feel is very addressable, I have never been more confident about DocuSign and optimistic about the big growth opportunity we have ahead.”
At DocuSign’s share price of US$155.37, it has a price-to-free-cash-flow (P/FCF) ratio of 72x.
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Company #2: Fiverr International Ltd (NYSE: FVRR)
Fiverr is a marketplace that connects freelancers and people needing freelancing services.
The company’s stock price has tumbled 50% over the past six months, from US$227.95 to US$113.68 at the time of writing.
The Fiverr share price has taken a backseat especially since August 2021 after the company announced its financial results for its 2021 second quarter.
In the second quarter, Fiverr’s revenue grew strongly by 60% year-on-year to US$75.3 million.
But the company reduced its guidance for the rest of the year due to the lifting of COVID-19 restrictions worldwide (highlighted in the screenshot below).
For the 2021 third-quarter, Fiverr guided for a revenue of US$68 million to US$72 million. In reality, the firm’s third-quarter revenue exceeded its guidance.
Fiverr’s revenue for the latest quarter grew 42% year-on-year to US$74.3 million.
The increase was driven by:
- Higher active buyers, which grew 33% to 4.1 million, compared to 3.1 million as of end-September last year
- Growth in spend per buyer, which increased 20% to US$234, compared to $195 a year ago
- Increase in take-rate to 28.4%, up 1.4 percentage points from 27.0% last year
Definition of take rate: Take-rate measures the amount Fiverr takes a cut from transactions happening on its platform.
Fiverr also added that its business, including the traffic to its platform, improved from the hyper-seasonality that it had experienced in the earlier part of the third quarter.
So the lifting of restrictions didn’t hamper Fiverr’s business much, as feared by the company’s management in August.
In fact, Fiverr has raised its full-year 2021 guidance (screenshot below) as compared to the guidance given in the previous quarter (as seen in the earlier screenshot).
Over the longer term, with freelancing gaining wider acceptance due to the pandemic, Fiverr should continue doing well.
Micha Kaufman, chief executive of Fiverr, explained in the company’s latest earnings conference call:
“We believe the secular trends of remote work, and the need for digital transformation are here to stay, well beyond the pandemic. Businesses need to stay competitive in their talent strategy, to be adaptive in the ever-changing digital landscape, to creatively address the skilled labor shortage, and to be nimble and efficient in execution.
Fiverr estimates its TAM to be US$115 billion, and it looks like it has the opportunities to grow into this large market for decades to come.
At Fiverr’s share price of US$113.68, it has a P/FCF ratio of around 127x.
Company #3: Block Inc (NYSE: SQ)
Block, which was known as Square prior to this month, started off by providing dongles and apps to turn smartphones and tablets into POS (point-of-sale) systems.
Since then, however, it has expanded its business to provide over 30 products and services for businesses to help them manage and grow their business operations.
Block also owns the well-known Cash App, an ecosystem of financial products and services for individuals. Cash App competes with PayPal‘s (NASDAQ: PYPL) Venmo in the peer-to-peer payments space.
The diagram below shows Block’s two main ecosystems of Sellers (in blue) and Cash App (in green):
Block is also big on bitcoin investment and owns the cryptocurrency on its balance sheet. As of 30 September 2021, the fair value of its bitcoin investment stood at US$352 million.
The Cash App also allows users to buy, hold and sell bitcoin.
The value proposition of Block as an investment is that as sellers and individuals use more of its services, their activity with Block increases, reinforcing the company’s recurring revenue model.
From 2016 to 2020, Block’s net revenue has shown strong growth of 54% per annum, increasing from US$1.7 billion to US$9.5 billion.
For the nine months ended 30 September 2021, the company’s net revenue has already exceeded that of whole of 2020’s, coming in at US$13.6 billion.
Meanwhile, Block posted a net profit of US$243.1 million for the latest period, as opposed to a loss of US$80.9 million a year ago.
In terms of share price performance in the short term, Block’s shares have fallen significantly over the past half year.
However, over the longer term, the company has the potential to do well.
With Block’s large total market opportunity of US$160 billion and its penetration rates of below 3% each for the two ecosystems, Block is a company to consider for those looking for exposure to the payments and crypto space.
At Block’s share price of US$158.30, it has a P/FCF ratio of around 131x.
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Disclaimer: This information provided in this article is purely based on my opinions and is not intended to be personalised investment advice. The ideas discussed here are not recommendations to buy/sell any stock. The writer Sudhan P owns shares in DocuSign and Fiverr.
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