Popular investor Cathie Wood has taken a lot of heat lately in connection to her well-known Ark Innovation ETF (ARKK 1.43%), which has toppled 54% since the start of 2022. As its name implies, the exchange-traded fund is composed of high-growth stocks, most of which have been absolutely pummeled in response to the gloomy macroeconomic backdrop.
As long-term investors, however, we shouldn't be overly absorbed in short-term stock price movements. After all, if you look at Wood's portfolio, you'll notice that many promising businesses are down significantly from their highs. To me, that's a clear buying signal, and rather than waiting to buy, investors should exploit the recent correction by purchasing shares of high-quality companies today.
Let's check out one of the best stocks in Wood's Ark Innovation ETF that investors should consider buying now.
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Block is a top fintech stock
Fintech stock Block (SQ 1.68%) has nosedived 55% year to date and sits at the No. 5 spot in Wood's Ark Innovation ETF, accounting for 4.8% of the overall portfolio. The company's business is primarily comprised of two parts. It has its Square ecosystem, which combines hardware and software to help small businesses operate more efficiently. And then it has Cash App, a multipurpose mobile payment platform that enables peer-to-peer transactions, cryptocurrency trading, tax filings, and debit card services, among others. Block also completed its acquisition of Afterpay at the beginning of the year, a buy now, pay later service similar to Affirm Holdings.
In the second quarter, Block's top line declined 5.9% year over year to $4.40 billion, and it suffered a net loss of $209.3 million. Revenue from its Square ecosystem grew 32% to $1.73 billion, equal to 39% of total sales. Meanwhile, its Cash App ecosystem revenue decreased 21% to $2.62 billion, representing 59% of its top line. So what's going on with Cash App? Since consumers can buy and sell Bitcoin on the platform, Cash App revenue is significantly impacted by fluctuations in demand for the cryptocurrency. Given that Bitcoin was down 55% year to date and demand has softened, the fintech company's top line has taken quite the blow.
Block makes money as the middleman in Bitcoin transactions: It buys the cryptocurrency, applies a slight margin, and then sells it to its customers. It's a very low-margin business, which is why looking at the company's gross profit is a better indicator of overall growth. In the second quarter, its gross profit rose 29% year over year to $1.47 billion. Gross profit from Square and Cash App both increased 29% versus the same period a year ago. Thus, when analyzing Block's financial situation in more detail, it's abundantly clear that growth remains strong. Of course, it's worth noting that the fintech specialist isn't consistently profitable yet, which is another reason the stock is struggling in today's economic environment. But given its steady growth and diversified revenue streams, I believe Block is positioned to wind up a winner in the fast-growing fintech space.
Time to buy Block
Small businesses make up 44% of economic activity in the United States. According to Allied Market Research, the fintech market is forecast to expand at a compound annual growth rate of 20.3% through 2030, up to $698 billion. Between Square and its budding Cash App platform, Block appears perfectly positioned to be a key player in transforming the financial services industry in the years to follow.
Currently, the stock bears a price-to-sales multiple of 2.4, considerably below its five-year mean of 7.6. Thus, Block's promising future combined with its discounted valuation make it a fantastic buy at the moment. Over the long run, this is a stock that I believe could generate monumental gains for prudent investors. So let's just be patient for the time being.
