Some investors like to follow Warren Buffett and his teacher, Ben Graham. This means finding stocks that are trading at prices lower than their intrinsic values. In today's market environment, it might be challenging to deploy this strategy.
Other investors might take a more aggressive approach, looking to achieve strong returns by identifying companies that can increase their revenue and profits at above-average rates going forward. This view includes buying growth stocks and holding for the long haul. Investors interested in a more exciting strategy might choose this path.
If you're ready to put $1,000 to work, this fintech company might be the smartest growth stock to buy right now. At its price in the early afternoon of Dec. 15, you could buy about 15 shares.
Image source: Block.
This innovative business has two segments that serve different user groups
Block (XYZ +1.60%) is the growth stock investors should consider. The financial services innovator operates two successful segments that investors should be familiar with.
On one side, there is Square, which offers a wide range of products and services for smaller merchants to help them run their operations smoothly. The segment has about 4 million customers. It handled $67.2 billion in gross payment volume and generated $1 billion in gross profit in the third quarter (ended Sept. 30).
Cash App is Block's personal finance app, which provides basic banking tools to consumers with low or no fees, like peer-to-peer transfers, direct deposit, and stock market investing. It ended last quarter with 58 million monthly active users. Cash App is one of the most popular finance apps on the Apple App Store. Gross profit soared 24% year over year to $1.6 billion, faster than Square's growth.
Early in 2024, management revealed that Block was staring at large total addressable markets (TAMs). Square and Cash App have TAMs of $130 billion and $75 billion (based on gross profit), respectively. They have only penetrated a small fraction of these opportunities, which means plenty of untapped potential. Introducing new features for merchants and individuals, bringing on more users, and getting existing users to engage more are key growth factors.
NYSE: XYZ
Key Data Points
Block is betting on Bitcoin
Block made waves in October 2020 when it first purchased $50 million worth of Bitcoin to hold on its balance sheet. Co-founder and CEO Jack Dorsey isn't shy about expressing his belief that the internet will need a native currency and that Bitcoin is the leading candidate. Consequently, Block is getting more involved.
Cash App started allowing its customers to buy and sell Bitcoin in 2018. Square recently introduced Bitcoin payments, letting its merchants accept the crypto at checkout. Block sells Bitkey, a self-custody hardware wallet. And Proto is the company's bitcoin mining business that just collected revenue for the first time ever.
In Q3, Bitcoin activities only represented under 3% of the company's overall gross profit. It's tiny in the grand scheme of things. There might not be a material financial impact just yet, but the leadership team is clearly focused on projects related to the digital asset. Therefore, it probably makes sense for investors to be bullish on Bitcoin if they're thinking about becoming shareholders in Block.
Profit growth can drive stock returns
According to Wall Street consensus analyst estimates, Block's operating income is expected to rise at a compound annual rate of 54% between 2024 and 2027. This outlook is precisely what growth investors want to see, as it can help drive the stock price higher.
It helps that the valuation is attractive, which adds upside. Investors can buy shares at an EV-to-EBIT (enterprise value-to-earnings before interest and taxes) multiple of 15.1, 53% cheaper than the level exactly one year ago. Buying $1,000 worth of Block shares can potentially supercharge your portfolio.
