While the ongoing rout in the stock market is grabbing all the media attention, I am focused on identifying high-quality companies to own amid the sell-off. "Be greedy when others are fearful," famed investor Warren Buffett advised. Recent market fears have provided me the opportunity to purchase discounted shares in Block (SQ -1.57%).
There are a lot of things investors should like about this company. It's a booming payments business that has found a niche by catering to customers who have traditionally been ignored by big financial institutions. And there's plenty of growth potential as we look ahead.
Here's why I just bought this top fintech stock.
Image source: Getty Images.
Booming Cash App
For starters, Cash App, Block's tool for consumer personal finance, is an incredible business. Primarily targeting the lower-income and underbanked demographic, Cash App allows users to send money to friends, spend with the Cash Card debit card, set up direct deposit, and buy stocks and Bitcoin. As of year-end 2021, it had 44 million monthly active users.
Cash App emphasizes simplicity and ease of use. Furthermore, Block's ability to drive brand awareness of the product, like with Cash App Friday (where customers can win money) and an ad campaign with rapper Megan Thee Stallion to give away free blue-chip stocks, has catapulted Cash App to the top finance app download ranking on the Apple App Store.
In the most recent quarter, Cash App generated $624 million in gross profit, up 26% year over year. And cash in-flows onto the platform improved in February and March thanks to tax refunds. Most impressive is that it is estimated to cost approximately $20 to acquire a new Cash App customer, significantly lower than $1,500 for traditional banks to attract customers. That's a major advantage for Cash App.
Switching costs for sellers
Block's previous name, Square, refers to its original business, which provides a growing suite of various software, hardware, and financial services products for small merchants. While it started out offering a plain, white, square credit card reader, Square now offers merchants access to things like loans, loyalty program management, and checking and savings accounts. Add in transparent and simple pricing, words you don't hear in the payments industry, and it's not hard to see how sticky Square's sellers probably are.
Square targets small businesses, an area that was typically not served by big banks. "Square innovated where we should have," Jamie Dimon, CEO of JPMorgan Chase, once commented in reference to his company lagging the fintech pioneer.
Merchants with annualized gross payment volume greater than $500,000, what Square calls mid-market sellers, is the segment's fastest-growing cohort. Square is able to help its customers operate and expand their businesses, benefiting over time with more revenue potential. Management sees the Square segment as having a $100 billion market opportunity in the U.S. alone.
Afterpay acquisition
While many investors questioned Block's acquisition of buy now, pay later (BNPL) specialist Afterpay, wondering why the business didn't build the capability in-house, I think it substantially strengthens the company's network.
At the time of the announcement, Afterpay counted 98,000 merchants and 16.2 million consumers. What's more, Afterpay reported that it brings in 1 million leads per day for its merchant partners. Block essentially bought a thriving marketplace, something that would've taken years to develop on its own.
Block plans to continue fully integrating Afterpay into its existing operations. Cash App users can now use BNPL functionality, and Square merchants can now offer BNPL to their customers. The acquisition immediately makes Block's services more valuable for its user base. And the more transactions happening within Block's ecosystem, the more fees the business can ultimately collect.
Afterpay contributed $92 million in gross profit (of $1.3 billion total) to Block's business in February and March, the first two months that the BNPL company's financials were incorporated with Block's. I believe Afterpay makes Block a better business than it was before.
Current valuation
Since reaching an all-time high of $281.81 on Aug. 5 last year, Block's stock has lost 71% of its value. As a result, Block's price-to-sales ratio of just 2.5, near the lowest level it's been in the company's short public history, makes the stock look like a steal right now.
Electronic payments are only going to become an even more important part of the global economy, so it is a trend worth investing in. And I think Block, with its relentless focus on putting customers first with superior products and services, is set to continue thriving in the decade ahead.
