Cathie Wood, the founder and CEO of Ark Invest, got her reputation by investing in tech companies with huge growth potential. One of her top holdings is Block (SQ 2.32%), with her Ark Innovation ETF owning around $500 million in shares, roughly 6% of its entire portfolio.
There's a lot to love about Block stock. If its growth potential is realized, shares could easily double, triple, or even quadruple in value. Why are growth investors like Cathie Wood betting so big on the company? There are three major factors.
1. It has high-quality exposure to Bitcoin
Buying stock in Block is one of the easiest ways to get exposure to the massive growth of cryptocurrencies like Bitcoin.
Previously, the company was known as Square, and it made most of its money helping small and medium-sized businesses facilitate payment processing and other business-related activities like scheduling and inventory. It also developed a particular focus on mobile payments through its Cash App. You may have used its services without knowing it; millions of small businesses adopted the company's phone and tablet accessories that enabled the acceptance of credit and debit card payments with minimal investment.
At the end of 2021, however, the company rebranded itself as Block to reflect its growing ambitions to become a major player in the blockchain industry. Today, the company is highly focused on riding the crypto wave. For example, it owns Spiral, which develops open-source apps to accelerate Bitcoin adoption; TBD, which creates developer ecosystems that make it easier to build with Bitcoin; and Cash App, which was expanded to allow anyone to transact in either conventional currencies or cryptocurrencies.
If demand for cryptocurrencies continues to rise, Block is positioned to be a primary beneficiary.
2. Block is getting closer to being profitable
Most high-growth companies struggle with profitability as they look to reinvest earnings as quickly as possible to expand. This reality is true for Block, or at least it was. Since 2016, the company has posted negative quarterly earnings a majority of the time. That's an acceptable reality for a while, but only as long as the market believes that the company is reinvesting its capital properly.
Over the last 12 to 24 months, many high-flying growth stocks have seen huge declines in share price as the market grew weary of supporting money-losing businesses. After posting one of its biggest quarterly losses in history last year, Block stock was also on the chopping block, though profits could soon be just around the corner.
In the second half of 2023, Block CEO Jack Dorsey laid out a new plan focused on profitable growth. The company, for example, would keep a cap on headcount, wind down some unprofitable businesses, and target a more efficient marketing spend. Within two years, Dorsey believes, Block can not only return to profitability, but also achieve long-term profitability margins that it has failed to sustain in the past. Owning around 11% of Block's shares -- the majority of his multibillion-dollar wealth -- Dorsey certainly has every incentive to make good on his promises.
3. Block shares finally look cheap
Because it is focused on high-upside opportunities, Block stock has rarely been a bargain. At times, shares traded as high as 15 times sales. Those who held the stock through the wild ups and downs have done quite well, with shares rising roughly 400% in value since 2016.
Today, shares trade near their lowest valuation in history thanks to the sell-off of high-growth tech stocks after the height of the COVID-19 pandemic. After the sell-off, the stock is valued at just 1.8 times sales. Compared to its long-term average price-to-sales multiple of 5.9, this appears to be quite a bargain.
High-growth stocks are known for their volatility. The market often falls in love with these companies, but when growth stutters, valuation multiples suddenly crash, causing share prices to follow suit.
As Block's long-term track record proves, however, patient investors willing to ride these highs and lows can make several times their initial investment over just a handful of years. With the stock now trading at a deep discount to its history with plenty of growth runway still ahead of it, it's no wonder high-profile investors like Cathie Wood are still heavily invested in Block.
