Although it might seem daunting, investing in the stock market doesn't have to be a complicated task. By focusing on high-quality businesses that have compelling growth opportunities and competitive advantages, and that trade at reasonable valuations, investors can attain solid returns. It really can be that simple.
If you have $1,000 ready to put in the stock market now, you might want to consider splitting it equally between shares of Block (SQ -1.18%) and Netflix (NFLX 2.51%) -- two companies that meet all of those criteria.
1. Block
Through its Square segment, Block offers merchants mission-critical services such as payroll, invoices, card acceptance, and working capital -- tools that make running day-to-day operations easier. And through its popular Cash App service, Block lets customers seamlessly send money to friends, set up direct deposits, or buy stocks and Bitcoin.
Both segments' gross profits rose by double-digit percentages year over year, which I view as extremely impressive growth given the uncertain macroeconomic environment.
On the bottom line, Block's net loss of $17 million in the first quarter was much better than its $204 million loss in the year-ago period. By cutting its sales, marketing, general, and administrative spending, the business is optimizing its costs. And consensus estimates actually call for diluted earnings per share of $1.72 in 2023 and $2.40 in 2024, a welcome outlook after its big loss in 2022.
According to the company's most recent letter to shareholders, Square processed $46 billion in gross payment volume last quarter. And Cash App now has 53 million monthly active users.
Despite what are obviously two sizable segments already, management believes that Block's prospects are incredibly strong. They view the total addressable gross profit opportunity for the overall business at $120 billion. To capture more gains, Block will stick to its proven playbook of launching new products and services and entering new markets.
As of this writing, Block's stock is down by about 77% from its peak price. A multitude of factors such as higher interest rates, slower economic growth, and a bearish research report have pressured shares.
But I think the long-term outlook remains robust for this business. And its current price-to-sales multiple of 2.1 offers an attractive entry point for investors. It's hard to find a more impressive fintech stock than Block right now.
2. Netflix
With its 233 million subscribers (as of March 31), Netflix remains the leading service in the streaming entertainment industry. To be fair, its growth has slowed down meaningfully from the monster gains it posted during the depths of the coronavirus pandemic. However, Netflix was able to add 1.8 million net new customers in the most recent quarter, and its revenue rose 3.4%.
And management is focused on finding ways to boost growth. The long-anticipated introduction of a cheaper, ad-supported tier has finally come, with the company saying that early interest in the option is strong. I think this has the potential to be a game-changer for Netflix because it can expand the addressable market for the business by catering to more price-sensitive consumers. Moreover, the company's huge data treasure trove is a gold mine for advertisers.
Investors might shy away from putting money into streaming stocks because of how ridiculously competitive the industry has become. The number of services vying for our attention is large and growing -- but Netflix's scale gives it a huge advantage.
Thanks to its massive user base, the company was able to spend $17 billion on content last year while still generating free cash flow of $1.6 billion. In fact, the leadership team thinks Netflix can produce free cash flow of $3.5 billion in 2023. No other streaming rival benefits from these kinds of favorable economics, not even Walt Disney.
Over the past 12 months, Netflix shares have been on an absolute tear, rising 104%. But they are still down about 41% from their November 2021 peak. The stock now trades at a price-to-earnings ratio of 43.5, which is substantially below its 10-year average.
With a lot of growth potential, particularly in international markets, and an improving financial position, Netflix could be a worthy portfolio addition.
