Investors might be discouraged that Block (SQ 2.32%) hasn't participated in the broader market's rally this year. It's not all bad news, as a solid opportunity is here.
From a pure valuation perspective, this fintech stock looks like a screaming buy. It's 76% below its peak price from mid-2021, and it trades at an attractive price-to-sales ratio of 2. This makes now a good time to add Block to your portfolio.
But there are other reasons to like the stock, too.
Growth is key to the story
The best way to think about Block is to basically view it as two distinct businesses operating under one roof.
The company caters to small businesses via its Square segment, which provides a wide range of hardware, software, and financial services that enable merchants to accept payments and handle various operational tasks.
There's also Cash App. It's a personal finance mobile app that can be a substitute for traditional banks for some consumers. Individuals can send or receive money, set up direct deposits from their employers, sign up for a Visa debit card, or buy stocks, all from an easy-to-use interface.
Like many of its fintech peers, growth has been the key to Block's story in recent years. Even in 2023, when higher interest rates and inflationary pressures are on everyone's mind, the business continues to expand.
Square and Cash App saw gross profit increase by 15% and 27%, respectively, in the the third quarter. These are still healthy gains.
However, what should excite investors is the management's long-term outlook. From a gross profit perspective, executives believe that Square has a total addressable market opportunity of $120 billion, while they think Cash App's opportunity stands at $70 billion.
Although it's always smart to take any leadership team's targets with a grain of salt, mainly because they are used to drive investor interest, there are two primary reasons to be bullish on Block's potential.
For starters, the company is focused first and foremost on providing an exceptional user experience. This means creating products and services that meet customer demand and are easy to use. By competing with legacy payment providers and banks that are not always easy to work with, Block has an advantage that will benefit it for a long time.
Block is also still primarily a domestic business, with 83% of Square's gross profit derived from the U.S. last quarter. To be clear, the company does have a presence in multiple countries. However, it has yet to make sizable inroads overseas. By successfully transplanting what has worked so well domestically to international markets, Block can continue its rapid growth.
Bitcoin bump
An investment in Block is also an indirect investment in the success of Bitcoin, the world's oldest and most valuable cryptocurrency. Some people who aren't familiar with the company might not understand this reality.
Jack Dorsey, Block's founder and chief executive officer, is committed to advancing the utility and adoption of Bitcoin. In fact, Block has two divisions, known as Spiral and TBD, that are entirely focused on working on Bitcoin-related projects.
But Cash App is where Bitcoin has the greatest financial impact on the company. In early 2018, Cash App started letting users buy and sell Bitcoin, collecting a tiny fee to provide this service.
The challenge is that financial results can be volatile, particularly as Bitcoin's price moves up and down violently, leading to unpredictable demand from Cash App customers.
This year, though, things have been trending in the right direction, with the top crypto's price soaring, leading to a 15% increase in Bitcoin gross profit for Cash App through the first nine months this year.
With the impending halving on the horizon in 2024 (which cuts Bitcoin's supply growth rate in half), coupled with the rising possibility of Bitcoin exchange-traded funds coming to market, this digital asset could experience a steady price surge. And Cash App could benefit.
This is just another reason investors should be optimistic about Block's prospects and buy shares.
