Buy these 2 stocks if you want 75-95% returns, according to Wall Street

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The stock market can be volatile, especially in the short term. But over time, companies that continue to show strong financial results are rewarded, and so do their shareholders. This is why it pays to invest in stocks that are arguably trading below their intrinsic value. Consider two stocks currently listed at just a fraction of what Wall Street analysts think they are worth: To block (NYSE: SQ) and Chegg (NYSE: CHGG).

SQ data by YCharts

1. Block: implicit increase of 95.5%

Block, the company formerly known as Square, changed its name in December to reflect the fact that it has grown beyond the company that first made it famous. Block first burst onto the scene and became known through the range of products it offered to small and medium-sized sellers and traders: the ability to turn almost any mobile device into a point of sale. But now it offers much more than that, and in particular it has branched out into personal finance and banking through Cash App. Block’s traditional selling business and its Cash app are working very well.

In the third quarter, the tech giant posted total revenue of $ 3.8 billion, up 27 percent from a year ago. Block reported total gross profit of $ 1.1 billion in the quarter, which is a 43% year-over-year increase. Its seller ecosystem contributed $ 606 million in gross margin, a jump of 48% from the third quarter of 2020. In addition, the gross margin of its Cash application was $ 512 million, or 33 % more than the quarter of the previous year.

Point of sale system

Image source: Getty Images.

The block broke even during the quarter, which may be of concern to some investors. Indeed, the business hasn’t always been profitable, but it’s fair to overlook the occasional red ink on the bottom line given its long-term outlook. Indeed, as finance and banking become increasingly digital, Block has already positioned itself to be a leader in this space as it competes almost directly with traditional banks.

Block now offers a range of services, including direct deposits, debit cards, and the ability to buy stocks and cryptocurrencies. The company has recently started offering these services to adolescents, under parental supervision of course. As Block argues, “Historically, adolescents have been underserved by not having wide access to financial services, and parents and adolescents have expressed a desire for these types of products.

Block’s Cash application alone has significant growth potential within the growing fintech industry. The combined opportunities of the company across the range of services it offers are enormous. That’s why, despite its underperforming the market last year, Block’s average price target of $ 285.88 – according to Yahoo! Finance – is well within the reach of the business.

2. Chegg: implied increase of 75.8%

In early November, shares of the learning platform Chegg fell almost 50% in one day. Investors were not happy with the company’s third quarter financial results and the forecast it released for the fourth quarter. Chegg is another one of those companies that has benefited from a shift to online business during the height of the pandemic. But last year, the business experienced a significant downturn due to a combination of factors, leading to declining student enrollments for its Chegg services.

In the third quarter, Chegg reported revenue of $ 171.9 million, an increase of 12% year-on-year. That’s well below the kind of quarterly year-over-year revenue growth the company has historically produced. While the headwinds the company is facing are real, it believes they are temporary, which is why management approved a billion dollar share buyback program in November.

This decision shows the confidence that Chegg has in his 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 a year ago.

Student sitting in bed in front of laptop and taking notes.

Image source: Getty Images.

The business thrives on its ability to provide expert solutions to textbook questions and problems to these subscribers. The more students join the platform, the more it will attract subject matter experts to answer complex questions, and the more questions answered, the more students looking for these kinds of services will join the platform. .

This is called the network effect, when the value of a product increases as more and more people use it. According to management, Chegg had 70 million unique questions in its database in the third quarter. It is the company’s weapon to attract more students to its platform in the years to come, and there remains significant growth potential. The company estimates that 102 million students worldwide could benefit from its services.

This leaves plenty of room for Chegg to grow their user base, revenue, and profit. This will help justify the confidence that management and Wall Street – the company has an average price target of $ 51.50 – have in the company.

A word on valuation

A correction was arguably long overdue for Chegg and Block, as both were trading at insane valuations. Looking at each company’s futures price-to-sales (P / S) ratio, they both look a lot more attractive now. Chegg’s advanced P / S ratio currently stands at 5.1 – which is about as low as it has been for over a year.

Meanwhile, Block’s forward P / S is 3.7, which is also near a 52-week low. These numbers are more than fair for companies with the potential of Chegg and Block. Wall Street is not 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 a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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