Wall Street seems to have forgotten about financial technology company Block (SQ 0.13%). The stock is down 75% from its highs and has given up all of its gains since COVID-19 began. However, just because the market is sleeping on Block doesn't mean you have to as well.
The company's grown into a sprawling conglomerate with two robust product ecosystems, all working within a massive global financial sector worth trillions of dollars. Here's why Block might be one of the best investments you can make during this market downturn.
Two massive product systems
Block started under its former name, Square; its mobile payment terminal was its flagship product. Today, Block has become far more complex. The company has two primary ecosystems: Square offers a variety of software and hardware tools for operating businesses, and Cash App allows for payments and digital banking.
NYSE: SQ
Key Data Points
Block has steadily added new features and capabilities to both of its ecosystems. Square began as a tool for processing payments but is now virtually an all-in-one business operating system, encompassing payments, inventory, payroll, point-of-sale, and marketing.
Cash App started with peer-to-peer payments but has steadily evolved into a digital bank. Users can pay, receive a physical payment card for spending, and save and invest their money, all within Cash App. Block doesn't have physical branches; it lives on smartphones, enabling it to acquire customers for just $10, on average, compared to the $300 to $600 retail banks spend. Cash App now has 44 million people transacting at least once a month, a threefold increase from three years ago.
Block wants to make its ecosystems as sticky as possible with customers -- businesses are much less likely to stop using Square if they run all of their operations on the platform. Cash App users are less likely to leave if they use it daily for their banking needs.
Steady financial performance
Adding new features while simultaneously expanding the user base has been very good for Block's growth. The company gauges its business performance using gross profit because of its many different revenue streams. Block's gross profit has steadily grown, undisturbed by external events, including COVID-19. Additionally, it has generated $563 million in free cash flow over the past year, adding cash to its balance sheet -- a great safety net if the economy falters.
SQ Gross Profit (TTM) data by YCharts
Block has roughly $3.2 billion in net cash (cash minus debt), which equals about 8% of the entire company's market cap today. A bear market can test growing businesses and put shareholders in a tough spot if the company becomes desperate to raise money. Block doesn't have that problem. While the stock's 75% decline doesn't send the message that Block is financially sound, the company should have plenty of staying power at this point.
A vast ocean of opportunity
Since its 2015 IPO, Block has steadily built up its Square and Cash App product systems, adding users and features along the way. So where does it go from here? The company's current playbook has a lot of growth left; management estimates that its total addressable market is roughly $190 billion in gross profit and that Block has penetrated less than 3% of that total.
Additionally, Block has made some bold moves to get into new product categories. It bought buy now, pay later (BNPL) company Afterpay earlier this year for $29 billion. The BNPL market alone could grow to $3.68 trillion by 2030. CEO Jack Dorsey is also a huge supporter of Bitcoin. Block intends to integrate the cryptocurrency and blockchain into its business model over time, beyond simply letting users buy Bitcoin through Cash App.
Block operates in this massive financial sector, a virtual greenfield of potential for a constantly evolving business that touches new parts of the industry each year. Block doesn't even have to become the undisputed leader in any specific area to realize enormous growth over the coming years, though the company's products are doing very well. Cash App has been the No. 1 finance app in the Apple App Store for the past five years.
SQ Gross Profit (TTM) data by YCharts
Block's future looks bright, which underscores how silly Mr. Market can sometimes be. The company's gross profit has roughly tripled since the last time the stock price was this low. Investors could see tremendous long-term returns if Block maintains its momentum over the coming years, and so far, there doesn't seem to be much evidence that it can't.
