Block stock has been on the outs with investors over the past two years or so. It was once a skyrocketing, expensive, and popular stock, but investors lost interest after the company began to lose focus and the price looked too high to sustain.
It's been gaining some momentum over the past few months as it continues to demonstrate growth and looks like it's getting back to its original mission. However, if you're excited about financial technology, I would recommend you take a look at StoneCo (STNE 5.01%) and Bill Holdings (BILL 3.21%).
1. StoneCo: The Latin American answer to Block
StoneCo is a Buffett stock that doesn't quite fit the typical mold of the Berkshire Hathaway portfolio. It's a growth stock that's been struggling with profitability. But things are beginning to look up for this Brazilian fintech company, and StoneCo stock gained 91% last year.
StoneCo is very similar to Block's seller's business, which it still calls Square. It sells hardware and software for small businesses, but it has an expanded set of financial services, including banking and credit products. It has also widened its target market to include medium and large businesses.
Revenue increased 25% in the 2023 third quarter from a year earlier, and the active payments clients base was up 42%. Adjusted net income increased more than 300% with a margin of 13.9%.
There's been plenty of turmoil at StoneCo over the past few years. It grew very quickly and lost some direction, it's been dealing with regulatory problems, and there's been a large turnover in management. That trickled down into profitability issues.
It's had a new chief executive officer for almost a year, and he's committed to turning things around. So far, so good. Part of management's strategy is optimizing the platform, and the pivot to targeting larger customers is leading to higher user engagement and sales. Customers that engage more are also more profitable, and this is the model the company is leaning on to sustain profitability at scale.
StoneCo stock trades at a price-to-free cash flow of almost 20, which looks like a bargain. It's not for the most risk-averse, but there's tons of opportunity as it charts a path forward.
2. Bill: A niche small business ecosystem
Bill Holdings operates a back-end platform for businesses that automates accounting and payment processes. It's the kind of solution that almost any small to medium-sized business will find beneficial, and the cost is justified by the expensive human labor that's freed up for other activities.
Bill has more than 470,000 clients that pay to use its software, and that recurring revenue is an important part of the investing thesis. But it also makes money from its 5.8 million network members, who pay a small processing fee for being part of the payment system.
Revenue increased 65% over last year in fiscal 2023 (ended June 30), but it's slowing down, up 33% in the 2024 first fiscal quarter. Clients are curtailing their spending in the pressured economy, and in this climate, Bill is also being more deliberate in its expense management. Gross margin widened from 80.4% to 81.6% in the first quarter, and the net loss is narrowing while expense growth has stabilized.
BILL Total Expenses (Quarterly) data by YCharts
Management sees a clear path toward growth in recruiting new members, generating higher engagement, and expanding to new regions.
Bill stock fell 25% in 2023, and it trades at a price-to-free cash flow ratio of 43, which is about the cheapest it's ever been. As inflation moderates and companies begin to spend again, Bill's stock could take off this year, and it has a long growth runway ahead.
