For shareholders of Block (SQ 0.13%), the past couple of years have been extremely difficult to handle. The digital payments and software business has seen its stock crater 84% since it hit an all-time high in August 2021. Yes, macroeconomic headwinds have negatively affected this fintech company's growth numbers.
But all hope isn't lost. Block still has some serious potential. Prospective investors might be thinking about whether the beaten-down stock is a buy right now. Here are some reasons why it most assuredly is.
Improving the customer experience
Let's face it. The financial services industry has long been in need of a makeover. Outdated systems, technology, and user interfaces have opened up the opportunity for a business like Block to challenge the status quo, and this innovative company has found notable success.
Growth is a key part of the narrative here. Total company gross profit increased 27% year over year in the most recent period (second-quarter 2023, ended June 30). Despite macro uncertainty, this gain is still healthy, no doubt. And it's on the backs of 62% growth in 2021 and 36% in 2022.
Block's performance is dictated by two thriving ecosystems. Square focuses solely on merchants. Its gross profit of $888 million last quarter represented 47% of the company's total, so it's clearly important.
The founders saw an opportunity to help smaller merchants, those that were ignored by larger financial institutions, accept card payments. The goal was to introduce a one-stop, seamless solution that significantly improved the customer experience.
These days, Square offers everything from point-of-sale terminals and invoicing tools to working capital loans and marketing capabilities, among many others, for its merchant base. Gross payment volume of $54.2 billion was up 12% year over year. And Square is making an effort to attract larger merchants, which will help reduce macro sensitivity.
NYSE: SQ
Key Data Points
Cash App generated 52% of Block's gross profit in Q2. In a similar strategic playbook to Block, Cash App's goal is to target people who are generally unbanked or underbanked, and not considered worthwhile for larger banks to bring on as customers.
It's worked out well. Cash App is growing faster than Square right now, and it counts 54 million monthly active accounts. The customer's needs are always a priority. In a single, easy-to-user interface, individuals can send, spend, borrow, or invest their money.
Combined, management sees a $190 billion total addressable gross profit opportunity for Square and Cash App. Annualizing last quarter's gross profit figure, the business has only penetrated 4% of its opportunity.
It's difficult to bet against a company that sells superior products and services, while also having a huge expansionary runway. Just looking at these aspects should encourage investors to buy shares.
Cheap valuation
From its initial public offering (IPO) in November 2015 to its peak price in August 2021, Block shares skyrocketed over 2,000%. It would be a challenge to find stocks that performed better than this one.
However, thanks to rapidly rising interest rates in 2022, coupled with ongoing macroeconomic uncertainty, some growth tech stocks are still out of favor with investors. Block fits into this category of beaten-down companies. Its shares are down 30% this year. That's extremely disappointing given that both the S&P 500 and the Nasdaq Composite are up double-digit percentages.
Right now, Block's stock trades at a price-to-sales (P/S) multiple of under 1.4. Since its IPO, the average valuation is over 6, so things are very cheap right now. In fact, Block is selling at near the cheapest P/S ratio it has traded at ever.
I can understand why some investors would be scared away by the crushed valuation. The thinking might be that perhaps there is something fundamentally wrong with the business. But investors who look at the facts should see that there are a lot of reasons to like Block stock right now.
