Block(NYSE: XYZ), the fintech company formerly known as Square, was once a hot growth stock. It went public in 2015, and its revenue grew at a compound annual growth rate (CAGR) of 55% from 2015 to 2021. That growth was fueled by the expansion of Square's digital payment platform and the popularity of its Cash app for peer-to-peer payments, Bitcoin transactions, and commission-free stock trades.
But from 2021 to 2024, Block's revenue only rose at a CAGR of 11%. From 2024 to 2027, analysts expect its revenue to grow at a CAGR of 9%. Three headwinds are curbing its growth: competition from other digital payment platforms, inflationary headwinds for consumer spending, and elevated interest rates, which are dragging down Bitcoin, keeping investors from actively trading, and compressing its valuations. Its earnings per share (EPS) is only expected to grow at a CAGR of 1% from 2024 to 2027.
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Block has a market cap of $33.4 billion, and it looks reasonably valued at 22 times forward earnings estimates and 1.3 times this year's estimated sales. Assuming it matches analysts' expectations and still trades at the same price-to-sales ratio by the beginning of 2027, its market cap could grow by about 22% to $40.7 billion over the next two years.
That would be a decent gain, but Block's high-growth days might be over unless it finds fresh ways to revive its maturing fintech business. Meanwhile, two higher-growth tech stocks with smaller market caps -- Datadog(NASDAQ: DDOG) and Zscaler(NASDAQ: ZS) -- could easily outperform Block and eclipse its market cap in just two years. I predict they will.
Many companies run a broad range of software applications across different computing platforms. That fragmentation makes it tough for IT professionals to fix software problems quickly.
Datadog addresses those challenges by breaking down those silos, monitoring all of those applications in real time, and aggregating that diagnostic data onto unified dashboards. It also feeds that data into its Bits AI generative AI chatbot, which makes it much easier for IT professionals to fix their software problems. That streamlined approach has impressed a lot of companies, and it faces far fewer macro headwinds than Block and other consumer-dependent companies.
From 2020 to 2024, Datadog's revenue grew at a CAGR of 45% as its number of large customers (which generate more than $100,000 in annual recurring revenue) by the end of the year nearly tripled. It also turned profitable on a generally accepted accounting principles (GAAP) basis in 2023, and its net income nearly quadrupled in 2024.
From 2024 to 2027, analysts expect Datadog's revenue and GAAP to grow at a CAGR of 21% and 20%, respectively. Its stock isn't cheap at 10 times this year's sales, but its early mover's advantage in its niche market and the stickiness of its ecosystem could justify that higher valuation. If Datadog matches analysts' expectations and still trades at 10 times its forward sales by the beginning of 2027, its market cap could swell 50% from $31.5 billion to $47.3 billion over the next two years.
The cybersecurity play: Zscaler
Zscaler is a cybersecurity company that provides "zero-trust" tools that treat everyone -- including a company's top executives -- as potential threats. In the past, many cybersecurity companies installed these services through on-site hardware devices. However, that approach took up lots of room, required constant on-site maintenance, and was expensive to scale as an organization expanded. Zscaler solves those problems by only providing its zero-trust tools as cloud-native services.
That simpler approach drew in a lot of customers. From fiscal 2019 to fiscal 2024 (which ended last July), its revenue grew at a CAGR of 48%. Today, it serves more than 7,500 customers, including 30% of the Forbes Global 2000. It's also naturally insulated from the macro headwinds because its clients generally won't shut off their digital defenses to save a few dollars.
From 2024 to 2027, analysts expect its revenue to rise at a CAGR of 21% as it turns profitable by the final year. Its business is maturing, but its niche in the cybersecurity market might have a brighter future than that of cooling fintech companies like Block.
With a market cap of $30.6 billion, Zscaler isn't cheap at 11.5 times this year's sales. But if it maintains its premium valuation and matches Wall Street's estimates, its market cap could grow about 45% to $44.3 billion by the beginning of 2027.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin, Block, Datadog, and Zscaler. The Motley Fool has a disclosure policy.
