Block (SQ 3.19%) has taken its investors on a wild ride. Shares were once a huge winner in the years leading up to the all-time high reached in August 2021. It helped that the stock market performed well during that time.
But with general pessimism surrounding growth-oriented businesses in more recent times, particularly ones that benefited greatly during the depths of the pandemic, it's been a disappointing story since. This fintech stock currently trades about 75% below its peak price.
Does Block still have what it takes to become a millionaire maker?
More than a payments company
Block's overarching goal is to increase economic freedom. While this started by making it possible for small merchants to accept card payments from their smartphones, the company has now become a provider of comprehensive financial services.
Square is the segment that offers various hardware and software tools, like point-of-sale devices, loyalty programs, and banking services (among many others) to merchants. Over time, more merchants use more products, tying them closer to the Square ecosystem.
The company's Cash App, an extremely popular personal-finance app that caters to individuals, currently has 57 million monthly active users, a figure that has steadily climbed. As consumers start to set up direct deposit or sign up for the Cash App debit card, for example, more money is set to flow through the Cash App ecosystem. Again, this can drive customer loyalty, reducing the likelihood of churn.
The fact that Block, via Square and Cash App, has found tremendous adoption with its target customers gives me confidence that the company will be successful for a very long time. And if you want to make $1 million from any stock you invest in, it's crucial to make sure it has staying power.
Management is optimistic about long-term growth potential. It forecasts a $130 billion addressable market (based on gross profit) for Square, with a $75 billion opportunity for Cash App. Based on Square's and Cash App's first-quarter gross profit of $820 million and $1.3 billion, respectively, both of these ecosystems have only captured a tiny share of that total projected amount. Therefore, there is a huge runway for expansion in the years ahead.
NYSE: SQ
Key Data Points
Valuation upside
Chief Executive Officer Jack Dorsey said last year that the focus is to run a more efficient organization. This means keeping costs in check while driving improved profitability over time.
The plan seems to be working. Block reported an impressive $364 million of adjusted operating income in the first quarter. The expectation is to report $1.3 billion for the full year.
For a business that has left much to be desired when it comes to bottom-line performance, instead prioritizing growth at all costs, this is welcome news for shareholders. It's a sign that perhaps Block is entering a more fiscally responsible stage of its life cycle.
As revenue and gross profit grow, the hope is that profit will go up as well. And this helps from a valuation perspective.
As of this writing, Block shares trade at a forward price-to-earnings ratio of 21. That's about in line with the broader S&P 500 and cheaper than the tech-heavy Nasdaq 100 Index. Of course, if earnings can climb higher over time, the valuation becomes even more compelling.
I believe Block does have the chance to become a millionaire maker over the very long term. Besides a reasonable valuation, there is huge growth potential as it introduces new products and services, adds new customers, and enters new markets.
