The tech stock sell-off that investors have seen since late 2021 has not spared many companies. Even large, established businesses have been hit, including Tesla (TSLA -3.55%) and Nvidia (NVDA 0.76%). Both are among the biggest companies in the world, yet they have seen their share prices fall 26% and 44%, respectively, from their all-time highs.
Block (SQ -1.97%) is in a similar boat. It is one of the leading fintech platforms for consumers and small and medium-sized businesses (SMBs), and it is seeing continued adoption. However, the shares are down about 65% from their all-time highs. With the stock trading at a huge discount despite its size and scale, competitive advantages, and potential, I think Block is a no-brainer investment at these levels.
Image source: Getty Images.
The reason for the drop
While no investor knows for certain why shares of Block fell off a cliff, it wasn't because of a bad earnings report. Block has either beat or met Wall Street's earnings estimates over the past four quarters. With that, the likely culprit is the industrywide sell-off that has ravaged many growth stocks, including the tech-heavy Nasdaq Composite Index -- which is down nearly 22% from its all-time high.
Because of this fall, investors have a major bargain on their hands. Block trades at 2.9 times sales, which is noticeably lower than its primary rival, PayPal Holdings, which trades at four times sales. This is despite Block's impressive improvements last year, where 2021 gross profit jumped 62% year over year to $4.4 billion. The Cash App ecosystem was the primary driver of this, boosting gross profit 69% year over year last year.
Why Block has risen to dominance
Block has rock-solid network effects that also have a unique trait -- network effects exist within Cash App and the Square ecosystem separately, as well as between those products. Block has made it easy to pay with Cash App on Square products that sellers use to run their business. This means that as more consumers join Cash App, Block's seller ecosystem becomes more valuable to SMBs because of the simple payment method. As more businesses adopt Square, Cash App users can purchase things more easily, too, making it more valuable for them.
Separately, both Cash App and the Square seller ecosystem are strong. Cash App had 44 million monthly transacting users in December 2021, and the company is quickly getting them to engage more with the product. The company's Cash Card has seen impressive adoption, with 31% of monthly transacting users having one in December. Additionally, Block rolled out Cash App Taxes, which makes it easy and free to file taxes. Consumers can get their refund a few days early if they receive it in Cash App, which encourages higher engagement.
The Square ecosystem -- the products for SMBs -- has also been thriving. In 2021, 38% of Square's gross profit came from customers using four or more products. These customers are much more lucrative compared to low-engagement users: In 2021, sellers using four or more products generated 10 times more gross profit than sellers only using one product, on average. This means that as this cohort grows, the Square ecosystem will become increasingly profitable, which is a good sign for investors.
Importantly, Block is looking to take its dominance in the SMB market across borders. Just 9% of Square's gross profit came from outside the U.S. in the fourth quarter of 2021, which creates a large opportunity for Block. The company recently introduced its SMB products in Spain, which is the fastest-growing e-commerce market in the European Union. Time will tell, but this exploration outside of the U.S. could prove to be a very fruitful endeavor.
One potential risk: Its focus on Bitcoin
All of this increased engagement and activity on all sides of Block's platform is great to see, and it reinforces its leadership in the fintech industry, along with its network effects. All products being connected and cooperative with other parts of its business can drastically increase value for its customers.
That being said, there is one big risk that I am concerned about. Chief Executive Officer Jack Dorsey and Block have taken an interest in cryptocurrency, specifically Bitcoin. While it is nice to know that the company is forward-looking, it only seems focused on Bitcoin, rather than other cryptocurrencies. This could be a big mistake. The crypto industry is young, so it could be difficult to determine the winner over the long term. Therefore, it might be smart for Block to spread bets across multiple tokens, rather than bet the farm on Bitcoin.
Keeping that in mind, I think investing in Block is worth the risk. The company's valuation is extremely low, despite being one of the leading fintech platforms in the U.S. It is also making strides to expand internationally, where it could use its robust network effects to dominate other large markets. Because of this combination of factors, I think investors who buy Block today could be well off a decade from now.
