The stock market has been hammered since the start of 2022, owing to a range of macroeconomic and geopolitical headwinds. On June 15, the Federal Reserve raised its benchmark federal funds interest rate by 75 basis points -- the biggest single step up in that rate since 1994 -- as it continues its attempt to tamp down inflation. To put it mildly, the market has not reacted positively to high inflation, rising interest rates, supply chain issues, and other challenges linked to Russia's invasion of Ukraine.
That said, plenty of stocks are now falling based on negative market sentiment rather than fundamentals. As prudent, long-term investors, we can exploit the ongoing correction by accumulating shares of high-quality companies while they are trading at alluringly low valuations. In fact, investors should buy stocks when it feels uncomfortable because it is from those purchases that we will often reap our biggest gains.
On that note, here's one financial technology stock that is down about 65% year to date, but that could generate excellent returns for patient investors over the long run.
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Block is a top dog in fintech
Block (SQ 5.04%), formerly Square, is a disruptive fintech company that continues to showcase its ability to innovate at a rapid clip. The company started by providing point-of-sale hardware and software to help small and medium-sized businesses handle credit and debit card payments, but it has since evolved into a far more diversified enterprise. Block also owns Cash App, a peer-to-peer mobile payments platform, and Afterpay, a buy-now-pay-later service similar to that offered by Affirm Holdings.
In its first quarter, the company led by founder Jack Dorsey generated $4 billion in sales -- a 21.7% decline from the prior-year period -- and adjusted earnings of $0.18 per share. The sharp drop in total sales can be attributed to a 51% pullback year over year in the company's Bitcoin revenue, which it generates when people buy the cryptocurrency via the Cash App platform. Essentially, Block serves as an intermediary in these transactions -- it buys Bitcoin from private brokers, takes a small cut, and then resells it to Cash App users. It's a very low margin business, and represented less than 5% of Block's gross profit in Q1, which is why investors should pay more attention to its gross profit rather than total sales.
The fintech's gross profit grew by 33.8% to $1.3 billion in the first quarter, driven by strong performances in its Cash App and Square businesses, which expanded their gross profits by 26.1% and 41.2%, respectively. Despite the steep reduction in Bitcoin revenue, the company's gross margin of 32.7% was much higher than the 19.1% it achieved in the same quarter a year ago. Block's multi-dimensional business model not only offers it many avenues for growth, but it also adds a layer of security for investors. The company is focused on growing rapidly, so it won't astonish you with its profitability metrics in the near term. But it could greatly reward investors in the long run. And as a bonus, the stock is trading for less than two times forward sales, making this an optimal moment to buy shares.
Worth a look today
The disconnect between Block's operational performance and its share price movement continues to widen -- a clear buying signal for long-term investors. Given its business model, the company has the potential to capture market share in a diverse range of industry segments. Block's promising commercial prospects, intertwined with its shrinking valuation, offer investors a strong margin of safety at the moment. If you want to invest in the future of the financial services industry, this stock is worth considering adding to your portfolio today.
