Cathie Wood is well known as the CEO of Ark Invest, an investment firm that focuses on owning businesses that have tremendous disruptive potential. Individual investors look to her for ideas, likely because the flagship Ark Innovation ETF is up 70% in 2023 (as of Dec. 22).
On the list of holdings, you'll quickly see fintech powerhouse Block (SQ 2.32%). In fact, Ark Invest has made two sizable purchases of this company's stock just in the month of December.
Should the average investor follow these moves? I think that's a smart idea. Here's why in 2024 you should buy Block stock, which is down 73% from its record high.
There's a lot of growth potential
When it comes to disruption and innovation, Block definitely fits the bill. The business, formerly known as Square, found rapid success by allowing a seamless and cost-effective way for merchants to accept card payments just by using their mobile device.
And on the consumer-facing front, Cash App provides what is arguably an easier user experience than a traditional bank. Individuals can handle basic personal finance needs all through an app. In fact, Ark Invest is extremely bullish on the adoption of digital wallets like Cash App.
In the last quarter (Q3 2023 ended Sept. 30), Block generated $1.9 billion of total gross profit. And both Square and Cash App posted double-digit annual growth, impressive in what has been a soft economic environment.
But as we look toward the future, there is huge potential to expand. Block's executive team believes there is a $70 billion opportunity for Cash App and a $120 billion opportunity for Square to penetrate. These forecasts are based on gross profit.
The long-term growth opportunity is certainly worth getting excited about, and it's likely a key reason that Ark Invest is interested in the stock. However, it's also easy to be optimistic with a near-term outlook.
If the Federal Reserve cuts interest rates several times in 2024, that accommodative monetary stance can be a boon for the economy. And this would translate into greater consumer spending, which would benefit both of Block's segments.
Block's economic moat
A lot of Ark Invest's holdings are earlier-stage growth companies, so they generally have shorter operating histories. And this usually results in the lack of an economic moat. But here's where Block differs.
Because Square provides so many valuable hardware, software, and financial services tools to its customer base, a valid argument can be made that there are switching costs at play. Imagine you are a merchant. It would be such a pain to have to change service providers without causing operational disruptions.
Even Cash App has moat-like characteristics. I think any banking or personal finance provider benefits from switching costs. As accounts get linked and payments get set up, for example, consumers are more likely to stay put.
But Cash App might also have network effects. Cash App customers who want to pay their friends might encourage them to sign up for an account.
The valuation is compelling
As we head into 2024, there might be no better time to scoop up shares of Block. The stock has gotten absolutely crushed in the past two and a half years. And it has gotten cheap on the way down.
Right now, shares trade at a price-to-sales multiple of 2.2. That's a huge discount to Block's historical average of more than 5.9. This deal might be too hard to pass up.
Furthermore, Block's gain in 2023 has been about half that of the Nasdaq Composite index. Should the business continue posting solid financial results throughout next year, investors should be rewarded.
