It's been a difficult time to say the least for shareholders of Block (SQ -8.12%). The purveyor of merchant services and consumer banking products saw its stock price fall a precipitous 24% in the month of September, continuing a longer-term trend that started in late 2021. A difficult macro backdrop and pressured investor enthusiasm deserve the blame.
But this business can make for an attractive investment opportunity, not least because of its beaten-down valuation. Before buying, here are three things you need to know about this fintech innovator.
Focusing on consumers
Generating 52% of the company's gross profit in the three-month period that ended June 30, Cash App is a booming segment for Block. Its gross profit jumped 37% in the last quarter, and it now has 54 million monthly active users.
Cash App is a mobile-based personal finance tool that investors can think of almost as a substitute for a traditional bank account. Individuals can set up direct deposit, get a free debit card, buy stocks and Bitcoin, and send money to others. The service is meant to be much more consumer friendly than the typical banking institution.
It's not hard to see why this is such a huge focal point for the management team, which see Cash App targeting a $70 billion gross profit opportunity. It costs about $10 to acquire a new Cash App customer, which is a huge advantage compared to the $450 average it costs for a regular bank. As the segment scales, with the help of cross-selling initiatives to get users more ingrained in the ecosystem, this should hopefully lead to positive net income.
Square is a key business line
Block's other prominent segment is known as Square, which is in fact the original name of the business. Square is the division that provides merchants with payment services, as well as various hardware and software solutions that help small businesses better handle their operations. Gross profit increased 18% in the latest quarter (on a year-over-year basis) to total $888 million.
Because Square focuses on smaller merchants, this segment is more exposed to the whims of the economy. In softer economic periods, small businesses might be feeling the pinch more than larger ones. However, it's encouraging to see that the gross payment volume (GPV) Square handled in Q2 of $54.2 billion was up 12% compared to the year-ago period and 40% more than two years ago. Double-digit percentage growth is impressive in this environment.
The executive team believes that Square has even more long-term potential than Cash App, mentioning a $120 billion gross profit opportunity for the segment. The key to the growth strategy is to enter new markets and continue to introduce new products and features that drive higher GPV volume and, as a result, greater revenue.
A beaten-down stock
I mentioned in the introduction about how this stock has been crushed. As of this writing, shares are an eye-watering 85% below their peak price, which was set in August 2021. Rapidly rising interest rates, put in place by the Federal Reserve to curb elevated levels of inflation, have caused investors to sour on growth stocks, especially ones that aren't consistently profitable. To add fuel to the fire, fintech stocks have largely fared worse.
This means that from a valuation perspective, Block looks cheap. Shares trade at a price-to-sales multiple of 1.4. That's about as cheap as the stock has ever been in its time as a public company. That's a span of nearly eight years!
Besides pointing to macro factors, it's hard to find compelling reasons that the stock has gotten so hammered, at least from a fundamental perspective. Yes, growth has slowed, but this is the case for most companies out there. Investors who view the current valuation as too attractive to pass up might now be inclined to buy the stock.
