Cathie Wood's Ark Invest considers disruptive innovation a key driver of capital appreciation, and the firm seeks to monetize that belief with index funds focused on cutting-edge technologies -- everything from artificial intelligence and robotics to DNA sequencing and fintech.

Accordingly, Ark has 3.7% of its portfolio invested in Block (SQ 2.32%), which makes the fintech company its sixth-largest holding. The conviction implied by that position size is at odds with the prevailing market sentiment. Block has fallen out favor as macroeconomic headwinds have stifled growth, and the stock has dropped 84% from its all-time high.

However, shares look significantly oversold at their present valuation, and with the S&P 500 (^GSPC 1.02%) just 9 percentage points from bull market territory -- a turning point that promises to send the broader market much higher -- now is a particularly good time to invest in Block.

Here's why this growth stock could triple by 2030.

Block is building a competitive moat

Block breaks its business into two product ecosystems: Square and Cash App. The Square ecosystem is a suite of hardware, software, and banking services that does away with the complex integrations often necessary with other merchant services providers. Similarly, the Cash App ecosystem consolidates the ability to deposit, borrow, send, spend, and invest money on a single platform.

In short, Square simplifies commerce for merchants, and Cash App simplifies finance for consumers. The complementary nature of those product suites is already a burgeoning competitive moat, but Block is working to unlock more synergies between the ecosystems with its buy now, pay later (BNPL) platform Afterpay.

Here's a brief overview of how those product suites come together:

  • Square sellers can accept payments online and in stores through Cash App Pay or Afterpay. The BNPL option is particularly noteworthy because it improves buyer conversion rates and boosts transaction sizes, according to management.
  • Afterpay merchants (including Square sellers that accept Afterpay) can engage consumers through Cash App's product discovery feature, and they can accept payments through Cash App Pay. Block also has the opportunity to bring Afterpay merchants into the Square ecosystem.
  • Cash App users can discover products and make purchases from Square and Afterpay merchants within the digital wallet, and they can manage their Afterpay accounts directly from the Cash App interface.

Ultimately, the ability to steer Cash App consumers toward Square and Afterpay sellers (and vice versa) could help Block disrupt the status quo in the commerce and financial services industries. Indeed, TD Cowen analyst Bryan Bergin says Block "boasts a fundamentally differentiated ecosystem in fintech, and the ability to grow and integrate its solutions make it among the most likely to challenge industry norms."

That opinion aligns with commentary from Ark Invest. The firm published a valuation model for Block in 2020 that noted: "As a comprehensive digital wallet incorporating Square's seller ecosystem, Cash App could integrate offline and online commerce, distinguishing it from both traditional and challenger banks."

Block is making progress on its strategic priorities

Block reported solid financial results in the second quarter, though growth has slowed amid the challenging macroeconomic environment. Total gross profit increased 27% to $1.9 billion, representing growth of 18% and 37% in Square and Cash App, respectively. And non-GAAP (adjusted) net income more than doubled to reach $247 million.

In the past Block has outlined several strategic priorities, including growing upmarket and expanding internationally with Square and broadening merchant acceptance of Cash App Pay. The company continued to make progress on those initiatives in the second quarter, as detailed below:

  • Square: Mid-market merchants (i.e., those with annual sales exceeding $500,000) accounted for 40% of gross payment volume in the second quarter, up from 39% one year ago and 35% two years ago. Similarly, international merchants accounted for 16% of Square gross profit in the second quarter, up from 15% one year ago and 8% two years ago.
  • Cash App: Block launched Cash App Pay with payment providers Stripe and Adyen, broadening its acceptance network beyond Square and Afterpay. That makes Cash App incrementally more valuable to consumers, potentially accelerating the network effect inherent to the digital wallet.

In 2022, Block valued its addressable market at $190 billion in gross profit, but the company has realized just 4% of that opportunity, leaving a long runway for growth. And with shares trading at 4.1 times gross profit -- essentially the cheapest valuation in company history -- there is plenty of upside for shareholders.

Why Block stock could triple by 2030

Block currently has a market capitalization of $27.6 billion, but that figure could triple by 2030 if the company grows gross profit at 15% annually and the stock trades at 4.3 times gross profit at the end of that period.

That seems achievable. Morgan Stanley expects Block to reach annual gross profit growth between 19% and 27% through 2024. In that context, annualized growth of 15% through 2030 is well within reach. Similarly, Block traded at an average valuation of 17.4 times gross profit over the last three years, which makes a multiple of 4.3 times gross profit in 2030 quite plausible.

For all those reasons, this fintech stock is a compelling buy.