From their initial public offering in November 2015 to their all-time high in August 2021, shares of Block (NYSE: SQ) have skyrocketed an impressive 2,060%. That gain easily trounced the broader indexes. Since then, the market has adopted a more subdued perspective on this fintech stock, as well as other once high-flying growth enterprises. As a result, shares trade 68% off that peak from more than three years ago.
You might be considering buying Block on the dip. Could this move set you up for life?
Block still has growth potential
Block registered tremendous growth over the years by attacking large end markets. For example, the leadership team estimates the total addressable market for Cash App to be $75 billion, while for Square it believes it's $130 billion (both on a gross profit basis). Given that Block generated an annualized gross profit of $9 billion in the third quarter (ended Sept. 30), there is a huge expansionary runway to target.
A key part of the strategy has been to introduce new features to customers. Recently, Square started offering AI tools to help merchants quickly upload data and onboard. For Cash App, the plan is to integrate buy now, pay later service Afterpay directly to Cash App debit cards. It's all about finding ways to boost user engagement, which can lead to more revenue and gross profit for Block.
Further tapping foreign markets also adds upside. During the latest quarter, just 18% of the Square segment's gross payment volume came from outside the U.S., leaving plenty of room to diversify geographic reach.
Block is getting financially fit
Throughout its history, Block's main goal has been to grow as quickly as possible, by creating new products and services and marketing to attract new customers. The market seems to always love a good growth story.
However, Block is adopting a different approach nowadays, something shareholders should appreciate. The business is trying to control costs and drive greater operational efficiencies. One way it has done this is by capping its employee headcount at 12,000 people.
The result is better bottom-line performance. After generating $351 million of adjusted operating income in 2023, management now expects to report almost $1.6 billion for this year, translating to a monster 344% year-over-year jump.
"We've driven performance in 2024 by focusing our strategies and by operating with expense discipline across personnel, structural costs, and corporate overhead costs," CFO Amrita Ahuja said on the Q3 2024 earnings call.
When they start to reach scale, software and payments enterprises should be able to produce outsize profits. This trend is starting to come alive with Block. The hope, of course, is that the company can keep growing its earnings base, while at the same time achieving robust top-line growth.
Investor outlook for Block
Block has certainly made a name for itself in the financial services industry, with a relentless focus on catering to both merchants and consumers. It continues to see strong growth prospects. And the management team has made it a priority to achieve better profitability. This is exactly what shareholders want to see from the businesses that they own.
But can Block set investors up for life?
In my view, setting investors up for life means that a stock can put up outsize investment gains for a very long time. That's a very hard outcome to predict with any level of certainty ahead of time, as it requires foresight about what the economy and new technologies will look like decades from now. This seems like an impossible task.
Even without the ability to know if a stock can set you up for life, Block still looks like a smart investment to make. Shares trade at a current price-to-sales ratio that represents a sizable 57% discount to their historical average. Long-term investors should take advantage of this buying opportunity.
Should you invest $1,000 in Block right now?
Before you buy stock in Block, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Block wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $847,211!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of November 25, 2024
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Block. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
