Though it appears like investor enthusiasm has never been higher, there are still buying opportunities to be found in the stock market. Even innovative and disruptive businesses are ripe for picking right now.
Block(NYSE: SQ) might be one of them. This fintech stock, which is led by the visionary Jack Dorsey, currently sits 72% below its all-time high. That peak price was set in August 2021, so investors have clearly soured on the company.
Is it time to buy shares?
Two distinct businesses
The best way to understand Block is by realizing that it is really two different businesses operating under one roof. Payments are at the heart of what this company does, but there is so much more going on.
Cash App caters to individuals, providing them with a wide range of financial services to better manage their money in an easy-to-use mobile interface. There are currently 56 million monthly active Cash App users, and the segment posted 33% gross profit growth in 2023.
On the other end, Square focuses on merchants, offering valuable tools like payment terminals, working capital loans, employee payroll management, and loyalty programs that make running a small business more seamless. This is what Block was founded on more than a decade ago. Square handled $53.5 billion of gross dollar volume in Q4, up 10% year over year.
Operating in the fintech sector means Block faces stiff competition from numerous sources. Cash App competes primarily with PayPal's Venmo, but it also goes up against traditional banks and brokerage services. And Square deals with a vast number of rivals in the merchant market.
To be clear, there are other, lesser-known segments that investors might not be familiar with. There's the music-streaming platform Tidal, as well as Bitcoin-related divisions Spiral and TBD, that don't really move the needle for Block from a financial perspective. At the end of the day, Square and Cash App drive the company's performance.
High growth potential
To its credit, Block has done a great job carving out a niche in the industry by prioritizing offering exactly what its customers needs to better manage their financial lives. This has been the case historically, and it will continue to be the case. Investors will appreciate this company's long-term growth prospects.
According to the leadership team, Square and Cash App combined have a $190 billion gross profit total addressable market. For comparison's sake, the entire company generated $7.5 billion of gross profit last year, meaning that it has captured just 4% of its estimated opportunity. Of course, investors should take these kinds of projections with a grain of salt, but it shows you the potential for Block to continue expanding.
By entering new markets, introducing new product and service features, and gaining more users, the business has a proven playbook to keep the growth going. I think as Block scales up, it's totally reasonably for shareholders to start expecting an improving bottom line. This year, management forecasts an adjusted operating margin of 13%.
Beaten-down valuation
Although the Nasdaq Composite remains near all-time highs, it can be discouraging knowing that Block shares haven't benefited from the market's strong rally. The stock has dropped 70% in the past three years.
But this is a much stronger company today than it was back then, with a greater focus on efficiency and financial soundness. And its prospects remain bright as we look out over the long term.
That's why at a compelling price-to-sales multiple of just 2.2, investors should really think about adding Block stock to their portfolios.
Should you invest $1,000 in Block right now?
Before you buy stock in Block, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Block wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.
*Stock Advisor returns as of April 8, 2024
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Block and PayPal. The Motley Fool recommends the following options: short June 2024 $67.50 calls on PayPal. The Motley Fool has a disclosure policy.
