Last year was a bloodbath for growth stocks. Even though 2023 is proving to be better, many growth-oriented companies remain down substantially over the trailing-12-month period. But as usual, this makes it a great time for opportunistic investors to look for stocks from the discount pile. And there are plenty of options to choose from.
Let's look at one specifically: Fintech specialist Block (SQ -1.68%), and examine three reasons to consider adding shares of this tech giant before the next bull market.
1. The downturn has created a good entry point
High-growth stocks often have scary-looking valuations, which perhaps helps explain why they have performed so poorly over the past year. Block was no different. The company's forward price-to-earnings (P/E) ratio came close to or even exceeded 150 in early 2021. But the fintech specialist's P/E has been dragged down back to Earth along with its share price.
Block's forward P/E currently sits at just under 43. It's a similar story for the company's forward price-to-sales (P/S) of 2.2, down meaningfully over the past couple of years.
SQ PE Ratio (Forward) data by YCharts
A P/S of around 2 or lower is generally considered good, so it looks like Block's valuation is finally reasonable, making now an excellent time to scoop up the company's shares.
2. The crypto business could be looking up
Another reason behind Block's poor recent showing is the fact that its Bitcoin-related revenue dropped substantially last year. Block allows people to trade Bitcoin through its peer-to-peer payment app, Cash App. Last year, Bitcoin revenue came in at $7.11 billion for the company, down 29% year over year. Bitcoin gross profit dropped by 28% year over year to $156 million.
That's because the price of the cryptocurrency dropped massively amid a bear market in 2022. But there is good news on this front. Crypto is performing better this year, at least so far, as are other asset classes, including equities. Will that remain the case for the entirety of the year? It's hard to say, but there are good reasons to answer in the affirmative.
It's rare for downturns to happen two years in a row. And if the broader market bounce back does continue, we can expect cryptocurrencies, including Bitcoin, to keep up. That will help improve Block's Bitcoin revenue this year compared to 2022.
3. There is massive white space ahead for Block
Lastly, looking at Block's opportunities is important, especially within its core square and Cash App ecosystems. Square offers top-of-the-line point-of-sales systems to small and medium-sized companies and a suite of complimentary services to make running a business as smooth as possible. Cash App is a bit like a bank as it offers people a debit card, investment services, the option to do shopping with merchants who accept Block's buy-now-after-pay service, and more.
Both ecosystems have been performing exceptionally well for Block. Last year, Square gross profit of $3 billion increased by 30% year over year, while Cash App's came in at $2.95 billion, 43% higher than the previous fiscal year. The total gross profit for the company last year was $5.99 billion, which is 36% higher than in 2021. Square and Cash App's annual gross profits registered compound annual growth rates of 29% and 86% over the past three years, respectively.
Yet Block is still only scratching the surface of the massive and growing fintech market. The company sees a total gross profit opportunity of $190 billion across its core businesses. That dwarfs what it recorded last year. Block certainly isn't the only company in this field. But it has arguably developed a competitive edge, especially within its Square ecosystem. The long list of invaluable services it offers makes it hard for businesses to leave.
Within its Cash App, Block has consistently increased the number of accounts. It ended the year with 51 million transactive actives (an account with at least one transaction), a 16% year-over-year increase. In my view, Block will continue growing these highly lucrative ecosystems and increase its revenue and profits over the next bull market and beyond.
That makes the company's shares a buy, especially at current levels.
