What happened
Shares of digital payments and fintech giant Block (SQ 0.59%), formerly known as Square, rallied 8.2% higher today as of 1:15 p.m. ET. Tech stocks in general were rallying ahead of the U.S. Federal Reserve's hotly anticipated announcement on its benchmark interest rate. The NASDAQ Composite was up 2.2%.
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So what
High-growth stocks that generate little-to-no profit have been bludgeoned in recent months. The Fed has indicated it will be hiking interest rates in an attempt to combat inflation, and that expectation for higher rates lowers the present value of risk assets like stocks. Additionally, many investors have soured on Block's rebrand late in 2021 that highlights the company's growing interest in developing the Bitcoin (BTC 0.15%) blockchain network. Block CEO Jack Dorsey believes working on the original cryptocurrency is a top priority as the world goes further down the digital path.
Given that Block (intentionally) generates very little free cash flow as a percentage of revenue, it's no surprise the market has punished the stock. Shares are down some 67% from all-time highs even after today's rally.
Now what
The Fed has been a short-term distraction and not for unwarranted reasons. Rising interest rates have shone a spotlight on the extreme valuations many stocks were touting at the end of 2021.
Nevertheless, the steep sell-off in Square could be overdone. Even though the company is using up a great deal of its profit to promote further growth and develop new digital finance services, it is generating returns. Free cash flow was $714 million last year -- only a 4% free-cash-flow profit margin based on the $17.7 billion in revenue generated. But bear in mind: Ten billion dollars of the total revenue were generated from Bitcoin, which currently doesn't generate any profit for Block. In contrast, the core Square ecosystem (for merchants) and Cash App (for consumers) businesses are quite healthy.
Long story short, Block is still a growth-now, profit-later investment. That will mean above-average volatility in the stock price. But given Block's fast-and-steady progress, now could be a great time to add to a position in the fintech company even as the Fed raises rates in 2022.
