1 Top Growth Stock to Buy Before it Soars 435%, According to Cathie Wood's Ark Invest

Cathie Wood is the founder and CEO of Ark Invest, an investment company that runs a series of thematic index funds focused on innovative technologies. In the fintech space, Wood and her team are particularly bullish on Block (SQ 2.32%).

Ark published a valuation model three years ago positing a stock price of $375 per share by 2025, implying a 435% upside from its current price. Returns like that on a two-year timeline may sound absurd, but Ark clearly has high conviction in Block. More than 5% of its portfolio is invested in the fintech company today.

Is this growth stock worth buying?

Block beat expectations in the third quarter

Block reported solid financial results in the third quarter, beating expectations on the top and bottom lines. Total gross profit increased 21% year over year to $1.9 billion -- driven by 15% growth in Square and 27% growth in Cash App -- and non-GAAP net income jumped 31% year over year to $345 million.

Management guided for 19% year-over-year gross profit growth in the fourth quarter, but Block has since reported a sharp increase in transaction volume across Black Friday and Cyber Monday, which points to a possible fourth-quarter beat. Better yet, in the latest shareholder letter, CEO Jack Dorsey outlined a detailed plan to grow the business and improve profitability through 2026. He says Block is "about to enter a phase of reacceleration."

With that in mind, Block values its U.S. market opportunity at $190 billion in gross profit, a projection that attributes $120 billion to Square and $70 billion to Cash App.

The investment thesis for Block

Through the Square and Cash App ecosystems, Block simplifies commerce for sellers and personal finance for consumers. Square offers a cohesive suite of hardware, software, and banking services that help sellers manage their businesses across online and offline locations, without the complex integrations and long-term contracts that traditional payment-services providers require.

Square initially caught fire with small merchants, but the company is successfully onboarding larger merchants with help from innovations like point-of-sale software tailored to retail, food and beverage, and appointment-based businesses. Indeed, mid-market merchants (i.e., those with annual sales that exceed $500,000) accounted for 41% of gross payment volume in the third quarter, up from 40% one year ago and 37% two years ago.

Cash App allows U.S. consumers to deposit, send, spend, borrow, and invest money from a single platform. That all-in-one approach to consumer finance is resonating with the market. Cash App was the third-most downloaded mobile app in the U.S. last year, behind TikTok and Instagram by Meta Platforms, and the most downloaded domestic digital wallet. In addition, a recent survey from The Motley Fool found that Cash App was the most used investing app across all generations.

Investors have two reasons to think Cash App can maintain its momentum. First, the network effect created by its peer-to-peer capabilities, coupled with its digital-native business model, means Block can acquire new users at a fraction of the cost of traditional banks.

Second, Block is connecting its seller ecosystems, Square and Afterpay, to Cash App to bring commerce to the digital wallet. The company has also extended Cash App Pay acceptance by partnering with DoorDash, Adyen, and Stripe. Commerce capabilities and broader acceptance make Cash App more useful, potentially accelerating the underlying network effect.

Ark Invest's valuation model for Block

Three years have passed since Ark published its valuation model for Block. It is possible that Wood and her team would evaluate the fintech company differently today. That said, Ark clearly has a great deal of conviction in Block given that 5% of its portfolio is invested in the stock.

In any case, the valuation model prices Block at $375 per share by 2025, implying a 435% upside in little more than two years. Ark arrives at that estimate by making several assumptions about Square and Cash App monetization, but the upshot is that especially strong growth in Cash App will push total gross profit to $15.7 billion in 2025.

For context, Ark's estimate implies annualized gross profit growth of 42% over the next nine quarters. That would be a material acceleration from 21% growth in the most recent quarter.

The stock is worth buying, but 435% upside by 2025 is nonsensical

I doubt Block shareholders will see returns anywhere close to 435% over the next two years. The growth Ark forecasts is nonsensical in the context of recent financial results and the current economic climate.

Indeed, strategists at Morgan Stanley expect Block to earn $10 billion in gross profit in 2025, implying 16% annual growth over the next nine quarters. Building on that, CEO Jack Dorsey expects "at least mid-teens gross profit growth" in 2026, meaning Block could maintain a double-digit growth rate for many years to come.

Those forecasts make its current valuation of 6 times gross profit seem relatively reasonable, especially when the three-year average is 16.3 times gross profit. In that context, investors should consider buying a small position in Block today, though there are certainly other buying opportunities across the stock market.