Block (XYZ 1.48%) -- initially called Square -- had its initial public offering (IPO) in November 2015. While the shares experienced wild bouts of volatility, the business registered fantastic growth. This was supercharged during the pandemic, which positively impacted many digitally enabled companies.
This fintech stock established its all-time high in August 2021, registering an unbelievable 2,060% gain from the IPO. But it's been a disappointing story since then. It's been 44 months since that record, so it's understandable for investors to adopt a pessimistic view of the business.
As of this writing, shares trade 81% off the apex. But there's now one obvious reason to be a buyer today.
Disappointed shareholders
I think it's important for investors to understand the stock's trajectory in the past few years. Shares of Block hit their peak during the 2021 bull market, which was boosted by the meme-stock craze, near-zero interest rates, and the after-effects of government stimulus following the onset of the COVID-19 pandemic. Greediness had swept the investment community.
Moreover, Block was putting up strong growth. Its gross profit jumped 45% in 2020 and 62% in 2021. Its Square platform was seeing huge gains in payment volume. Cash App was adding more users interested in a simplified and easy-to-use personal finance tool. There was also heightened activity around stock and Bitcoin trading.
Block had also announced the acquisition of buy now, pay later service Afterpay in August 2021 for $29 billion. At the time, critics argued that the deal was way too expensive. That view looks correct in hindsight, given the stock's disappointing performance since.
In the past three years, Block's gross profit increased at a decelerating year-over-year pace. Double-digit percentage growth is still the norm, though. But it appears that the days of more than 40% yearly gains are a thing of the past.
NYSE: XYZ
Key Data Points
Why Block stock is a smart buy
Despite shareholders losing money in the past 44 months, long-term investors should take a closer look at Block stock with a fresh perspective today. I believe it's a smart buying opportunity because of its cheap valuation. Right now, shares trade at a forward price-to-earnings (P/E) ratio of just 12.2. For comparison's sake, the S&P 500 trades at a 21.1 multiple. That discount is too hard to ignore.
If we look further out, the bargain is even more obvious. According to Wall Street consensus analyst estimates, Block is projected to report earnings per share (EPS) of $6.32 in 2027. This means the stock currently trades at just 8.6 times that forecast. That looks like an absolute steal.
A cheap valuation might not be compelling enough on its own. It's worth highlighting a couple of positive factors of Block's business, one concerning expansion and the other dealing with costs.
One reason to be bullish is the tremendous growth opportunity ahead. The leadership team estimates a $130 billion gross profit total addressable market (TAM) for Square and a $75 billion one for Cash App. Introducing new product features, like AI tools for sellers and small loans for individuals, while also cross-selling existing customers, is a key strategic focus. It also ultimately comes down to how much money flows through the Square and Cash App ecosystems.
Another factor showcasing the company's quality is its scalability. Management has prioritized cost cuts and operational efficiencies to boost the bottom line. It has worked thus far. And it's easy to believe this will continue, as the business can leverage product development and sales and marketing expenses. Gross profit was up 48% in the past two years, more than double the 21% pace that total operating costs rose during that same time.
It's hard to find a deal like this one today. Paying just 12 times Block's expected 2025 EPS is a smart move.
