It was a tough year to be a tech investor in 2022, especially if you held shares of high-growth companies that weren't gushing with cash. Though tech stocks have recovered considerably from last year's lows, it's hard to look past mega-cap tech's outsized influence (think the Magnificent Seven).
While you could just bet on the Magnificent Seven stocks after their magnificent year-to-date runs, I'd argue that there may be more value in some of the once-promising tech stocks that have been creamed over the last two years.
Looking Past the Magnificent Seven for Technology Gains
Fintech innovator Block (SQ), formerly known as Square, and e-commerce firm Etsy (ETSY) are two mid-sized technology companies that have struggled to sustain any rally over the past year. Further, shares of SQ and ETSY may be at risk of falling to even lower lows as market volatility makes its much-awaited return going into September.
But could these battered tech firms be next in line to rally as the tech industry's strength looks to broaden out to some of the smaller, more heavily sold players?
Until the Federal Reserve signals that it's finished with interest rate hikes or that cuts are on the horizon, I think it will be tough to convince investors to go after these beaten-down stocks that have hit profitability roadblocks.
At this juncture, SQ and ETSY shares lack a trailing price-to-earnings (P/E) multiple but possess forward P/Es of 32.6 times and 20.9 times, respectively. Clearly, forward P/E multiples north of 20 times are not indicative of deep value!
Regardless, the technical backdrop is looking pretty good as SQ and ETSY both look to settle into trading ranges that look to be backed by some pretty strong technical support.
Etsy stock has fallen into a range of support at around $69-72 per share.
Meanwhile, Block stock goes for $55 and change, and is hovering on the low end of the range it spent the past year sailing around.
That said, catching a falling knife can be pretty dangerous if you don't have plans to average down over a period of time. Fortunately, Etsy and Block stock have a lot more going for them than the technicals. And in this piece, we'll look at potential catalysts that could help both battered tech firms break out of their funk.
Etsy
Etsy is a beloved e-commerce platform for buying and selling handmade crafts and other intriguing vintage finds. The stock is down roughly 75% from its 2021 peak, and is flirting with multi-year lows again after giving back most of the relief gains enjoyed between June 2022 and February 2023.
In late 2021, when investors were more comfortable paying up for future growth, Etsy commanded a P/E ratio of more than 90 times. These days, investors can buy the stock for a P/E just north of 20 times. Investor enthusiasm has been tempered, and so too have growth expectations in this high-rate environment.
Earlier this month, Etsy reported some pretty stellar quarterly earnings results, with earnings per share (EPS) of $0.45 topping the consensus estimate of $0.42. Revenue of $629 million also beat expectations of $619 million. Despite the earnings beat, the stock proceeded to move lower anyway. It certainly doesn't help that August has been quite bearish for the broader markets.
In any case, I view Etsy as a potential value play as it gets back on the growth track. During a sit-down with Mad Money's Jim Cramer, Etsy CEO Josh Silverman noted that the platform has a "new all-time high" of active buyers.
That's a big deal. Once consumer spending improves in time, Etsy will have plenty of room to grow into its current multiple. Perhaps 20-25 times earnings is the right price to pay for Etsy. All considered, I view Etsy as modestly priced and technically strong.
Block
Just a couple years ago, a plunge of more than 80% would have been unthinkable for Block - but that's about how far the stock has fallen from its 2021 highs. It's been a long, painful decline for the fintech company behind Square Payments and Cash App.
Fortunately, I think the damage has been overdone. The recent second-quarter earnings results were decent, but were mostly shrugged off by downbeat investors.
Block's enjoying steady growth with progress on the profitability front. Cash App sales surged 39%, while Square enjoyed 12% growth. Meanwhile, Block reported $25 million in operating income. Overall, a "B" quarter in my books.
Combine those decent results with management's hiked guidance (adjusted operating income expected at $25 million for the full year), and I think it's hard not to give Jack Dorsey's fintech firm the benefit of the doubt while it's trading at multi-year lows.
Sure, there's stiff competition in the payments scene, but I'm a fan of the trajectory and the valuation. Whether Block has hit rock bottom remains to be seen. Either way, I think the stock ought to be trading a heck of a lot higher after that latest quarter.
The Bottom Line
Etsy and Block may not be profoundly profitable growth companies that can plow through a potential recession as well as the Magnificent Seven. However, both firms are just so battered. As they make moves to re-accelerate growth while improving their margins, I wouldn't be surprised if their technical support levels hold.
On the date of publication, Joey Frenette did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
