Financial services conglomerate Block (SQ -0.11%), formerly known as Square, has become an innovator when it comes to digital payments. The business rose to prominence by allowing small merchants to accept card payments. Now, Block has become a meaningful presence when it comes to individual consumers as well.
Shares of Block trade down about 73% from an all-time high closing price of $281.81 set in August 2021. The stock currently trades at a price-to-sales (P/S) ratio of 2.4, which is significantly cheaper than the stock's average historical P/S multiple of 6.2. This might be a potential buying opportunity for investors.
In fact, Block looks like a bargain stock right now. Here's why it could be a compelling addition to your portfolio.
Block has a strong economic moat
Investors could improve their returns by simply focusing only on businesses that possess a wide economic moat. This is a rare characteristic that a company has that gives it a competitive advantage in its industry, which can result in improving financial performance over time.
Block's economic moat is its high switching costs. The business was founded as Square but has expanded to do much more. But Square remains the segment that focuses on serving merchants. These days, Square provides both hardware and software point-of-sale payment solutions, as well as a wide range of services, from invoicing to loyalty programs to employee payroll. This makes Square a mission-critical component of small merchants' operations and one not easily replaced. Just think about the headache it would be for a customer to stop using Square and switch to a different offering from a rival company.
A similar competitive moat argument can be made on the Cash App side of Block's business. Cash App is a personal finance tool with 53 million monthly active users that lets individuals buy and sell stocks and Bitcoin, set up direct deposit of payroll checks, and send and spend money from their account. There's also a Visa debit card, called Cash App Card, that consumers can sign up for. The Cash App Card now has 20 million users.
Essentially, Cash App has turned itself into a functional substitute for many of the services that a traditional bank provides. For someone who uses it for most, or all, of their banking needs, there would certainly be switching costs when trying to move to a different financial institution.
Block has a sizable growth runway
To say that Block's past growth has been impressive would be an understatement. Between 2017 and 2022, gross profit went from $840 million to $6 billion, translating to a compound annual growth rate of 48%. And in the first three months of 2023, Square's gross profit increased 16% year over year to $770 million, while Cash App's jumped 49% to total $931 million. Amid an uncertain economic environment, characterized by higher-than-average inflation and the possibility of a recession, this company is still expanding at a rapid clip.
It's not hard to believe that this growth should continue in the decade ahead. According to the management team, led by co-founder and CEO Jack Dorsey and CFO Amrita Ahuja, Block's total addressable market (from a gross profit perspective) is $190 billion ($120 billion for Block and $70 billion for Cash App), so there is a ton of expansionary runway potential. By continuing to introduce new features and expand into new markets, the business is well on its way to capturing its opportunity.
Considering its powerful economic moat and sizable growth outlook, investors have two compelling reasons to like Block. Add in the bargain-basement valuation, and the stock makes for a worthy investment candidate today.
