Hypergrowth stocks are hard to find these days, as the boom in tech stocks during the pandemic has given way to a slowdown due to macroeconomic headwinds and difficult comparisons.
However, some tech stocks have continued to put up strong numbers, offering promising signs for their long-term prospects. If you're looking for growth stocks that can deliver over the long term, here are two.
1. GitLab
GitLab (GTLB -2.95%) went public in October 2021, just as the Nasdaq was peaking. The stock is down since then, but the underlying performance of the business is still strong.
GitLab offers a single platform for DevOps ("development and operations," a methodology in the software industry), helping enterprises of all sizes easily manage and deploy code and software updates. The company has grown briskly as it has replaced one-off point solutions for its customers.
In its third-quarter earnings report, revenue jumped 69% to $113 million; it topped its dollar-based net retention target of 130%, meaning existing customers increased their spending on the platform by at least 30% over the last four quarters.
Its customer base is also scaling up: It now has 638 customers with annual recurring revenue, up 49%.
GitLab is competing in a wide-open field; the company only has one close competitor, Microsoft's GitHub, and it faces no direct competitor in 50% of its pitches. It's penetrating an addressable market estimated at $40 billion, or roughly 100 times bigger than it is now.
It's also getting secular tailwinds from the shift in using point solutions to a single platform -- Gartner estimates that 60% of organizations will have made that switch by 2024, up from 20% in 2021.
Earlier in February, GitLab laid off 7% of its staff, following a trend across the tech industry; it said that customer demand had slowed. While that indicates 2023 will be a slower-growth year for GitLab, the move should also accelerate the company's progress toward profitability without jeopardizing its long-term growth potential.
2. Block
The parent of Square and Cash App, Block (SQ 0.54%) is one of the most disruptive fintech companies on the market. Square provides a suite of services for small businesses to help them accept payments and run their operations. Cash App started as a peer-to-peer payment app but has expanded into business payments, and stock and crypto investing; it even offers a debit card, showing its potential to get into new financial services.
Additionally, Block owns the "buy now, pay later" service Afterpay and the music streaming service Tidal. And it has acquired a number of cryptocurrency start-ups, because Block allows users to buy and sell Bitcoin.
Block measures its growth in gross profit, rather than revenue, as its cryptocurrency revenue is mostly pass-through. It just posted 40% gross-profit growth in the fourth quarter, to $1.66 billion; Square's gross profit was up 22% to $801 million and Cash App's up 64% to $848 million. For the first time, Cash App's gross profit was larger than Square's.
The company is also making progress in making its services stickier. For example, 44% of Square's gross profit came from sellers that used four or more monetized products, while Cash App grew its monthly transacting user base to 51 million, with two-thirds of those users using it weekly.
On the basis of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), Block delivers strong profits -- nearly $1 billion in EBITDA in 2022 -- though it's still unprofitable based on generally accepted accounting principles (GAAP).
Between Square and Cash App, Block covers a wide range of financial services, and the company sees a lot of opportunity ahead. In the Square ecosystem, the company is focused on growing the business upmarket with larger customers, global expansion, and omnichannel sellers, all of which represent large markets. Square's gross profit outside the U.S. more than doubled in the fourth quarter to $139 million.
Meanwhile, the company is seeing strong adoption of the Cash App card, with a 56% increase in transactions in the quarter.
As more financial services go digital, Block seems to be ready to capitalize on the opportunity as it expands Square and Cash App and looks to new businesses. That gives the stock significant upside potential.
Jeremy Bowman has positions in Block. The Motley Fool has positions in and recommends Block and Microsoft. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.
