Block's (SQ 0.18%) stock performance in 2020 helped mint a few millionaires. That pandemic-affected year, share prices zoomed higher, rising from $38 to $240.
Then everything came crashing down at the end of 2021. In just six months, shares lost more than 80% of their value.
Factoring in the decline and the potential this company has, right now is arguably the best time ever to buy Block stock. Two factors in particular stand out. First, shares are remarkably cheap for a company with such impressive growth rates. Second, this appears to be your last chance to secure a bargain valuation before the stock price takes off. Let me explain.
NYSE: SQ
Key Data Points
1. Growth stocks rarely come this cheap
Growth stocks tend to be expensive. When companies have a proven record of growing revenue at double-digit rates for years at a time, the market prices shares accordingly.
There are two ways to buy growth stocks at a discount. The first is to invest early, before a track record of growth appears. The second is to buy growth stocks during a period of turmoil. That's the exact opportunity with Block stock today.
At its core, Block is a payments company. Its Square payment processing platform is used by millions of businesses every day. But the company also owns other notable assets, like Tidal, the music streaming platform founded by Jay-Z, and Cash App, the popular peer-to-peer money transfer service. With a tech-heavy approach to growing industries, Block has averaged revenue growth rates of nearly 50% annually.
SQ Revenue (Quarterly YoY Growth) data by YCharts
As you can see in the chart above, Block's growth rates have come down in recent quarters. Still, over the past four quarters, revenue growth rates have ranged between 24% and 26%. This is still very much a company experiencing rapid growth.
Why, then, are shares priced so cheaply compared to the past? At just 2.4 times sales, Block stock trades at a cheaper valuation than at its IPO in 2015. Slower growth rates are partially to blame, but the biggest detractor appears to be an inability to remain profitable.
SQ PS Ratio data by YCharts
2. This is the year Block's bargain valuation disappears
When a company is growing quickly, the market is usually willing to backstop losses, sometimes for years at a time. Once growth slows, however, the market can quickly grow impatient.
On average, since its IPO in 2015, Block has just about broken even on an earnings-per-share basis. When the company turned profitable in 2020 and 2021, the share price raced higher to reflect this new reality: High growth rates and positive profits. When growth rates began to slow, however, these profits quickly reverted to losses -- a double whammy.
Last fall, Block founder Jack Dorsey rejoined the company as CEO, promising a return to profitability. A few quarters later, his promises were realized, with Block posting its first quarterly profit in roughly two years.
SQ EPS Diluted (Quarterly) data by YCharts
Block's return to profitability has already been noticed by the markets. Since Dorsey stepped back into the ring, Block's share price, and thus most of its valuation metrics, have roughly doubled. But that doesn't mean Block stock is no longer a bargain.
On a forward basis -- that is, based on what analysts expect Block's sales to be one year from now -- the stock still trades at just 1.9 times sales. Few profitable companies growing sales at 20% to 25% per year are priced at such a valuation. A few years from now, today's stock price might even value the company below 1 times sales.
This is not a risk-free bet. Dorsey was able to return the company to profitability last quarter, but just barely so. Whether he can replicate this feat in the quarters to come remains to be seen. Plus, less than two years ago, the company actually posted a negative quarterly sales growth rate, although this came after its biggest growth spurt in company history. It is these caveats that keep the stock price at bargain levels.
The best time to buy Block stock was several quarters ago, before its turnaround started to become reality. The second best time, however, is right now. If Dorsey strings together another few profitable quarters, there should be considerable upside for investors.
