Investing in the stock market is difficult because one is essentially trying to predict the future. While this is impossible to do consistently with any sort of accuracy, astute investors should always have some idea where the companies they own are headed, and use it to make informed portfolio decisions.
Block (SQ -2.62%), the well-known fintech innovator headed by tech genius Jack Dorsey, has experienced a slowdown in recent quarters. With its stock price down 81% from its all-time high set in August last year, the shares are now selling near levels last seen in the spring of 2020 right when the pandemic took hold of the global economy.
Where could Block be five years from now, and is the stock a buy today?
Remarkable success thus far
Block has come a long way from selling those little white squares that small merchants plugged into their smartphones to accept card payments. The company today offers numerous software, hardware, and financial services for its customer base of businesses and individuals. And it has registered enormous growth. Over the past five years, between the second quarter of 2017 and the second quarter of 2022, the business increased gross profit at a compound annual rate of 50%.
Today, Block is a powerful force in the world of payments. The company's Square segment, which caters to small and medium-size businesses, processed $48.3 billion in gross payments volume in the second quarter of 2022, up 24.5% year over year. Merchants can lean on Square not only for payment processing, but also for banking needs and help managing loyalty programs.
Then there's Cash App, a popular personal finance tool that now counts an incredible 47 million monthly active customers. Cash App users can send money to friends, spend with the Cash Card, set up direct deposit, and buy stocks and Bitcoin. Both Square and Cash App have become invaluable for their users.
Lately, Block is facing some headwinds, most notably a softening macroeconomic environment that can hurt payments volume and activity with both Square and Cash App. And this could have a more-pronounced effect on the company's buy now, pay later platform, acquired through Afterpay earlier this year, by raising the chances that customers default, leading to higher losses.
But a slowing economy is not specific to Block's business; it's something all companies must deal with. As of June 30, Block had $6.8 billion in available liquidity compared to $4.1 billion of long-term debt, giving me confidence in its ability to weather the storm.
A much larger business in the future
With that said, I think the long-term trajectory of Block looks promising. Management believes that the company has a lot of growth left. "With what we have in our portfolio today, we're now addressing a market opportunity of nearly $200 billion across Square and Cash App," Chief Financial Officer Amrita Ahuja said on a conference call with investors. That's up from $60 billion in 2017.
In 2021, Block generated 87% of its gross profit in the U.S., so pushing into international markets is a key focus. As of now, the company has a presence in the U.S., Canada, Japan, Australia, the U.K., Ireland, France, and Spain. In the first six months of 2022, Block introduced 44 new products to its international customers.
This innovative business will definitely attract new merchants and consumers to the Square and Cash App platforms. And the expanded user base will lead to higher payments volume and greater gross profit over time.
It's also not a stretch to think that Block can become firmly profitable in five years' time. The company's operating margin has trended substantially higher over the past decade. So, as the business scales up, starts to leverage its expenses more, and becomes better and more efficient at allocating capital, positive net income is on the horizon. In fact, by 2026, Wall Street analyst consensus estimates call for diluted earnings per share to come in at $4.01. That's a whopping 12-fold increase from 2021's $0.33.
Continuing to expand the business -- and ideally achieving profitability on a sustainable basis -- should lead to a higher stock price. And that's a good enough reason to buy shares today while they are well below their highs.
