Rapidly rising interest rates in 2022 have undoubtedly dampened the economic outlook, and led to massive sell-offs in earlier-stage growth companies in favor of more stable and profitable ventures. Businesses in the tech sector have been hit particularly hard.
dig deeper, FinTech Stocks This year has been crushed. But I don’t think investors should write them off completely. Some businesses stand out from the pack.
One of them is Payment Innovator Block (SQ -5.13%), formerly known as Square. Here are three reasons to raise shares before 2023.
1. Two Booming Ecosystems
What’s impressive about Block’s performance is that at a high level, it actually has two successful businesses. The Square segment, which offers a full suite of point-of-sale and financial services solutions for merchants, processed $50 billion in gross payment volume (GPV) in the third quarter, with 40% coming from mid-market sellers or annualized GPV. Generates over $500,000.
And then there’s the popular Cash app, which allows for direct deposits, sending and receiving money, and investing. The cash app counted 49 million monthly active users in September and generated $774 million in total revenue in Q3. This was up 51% from the year-ago period, giving a stark demonstration of how other companies are currently struggling to post meaningful gains.
Growth opportunities for both Square and Cash App include launching new features that will not only attract more customers, but make existing ones stickier as they use more of Block’s products and services. Management also has an opportunity to further expand into international markets to drive growth.
Payments are notoriously a very attractive business model. While the block has consistently reported operating losses in the past years (besides 2019 and 2021), this figure will increase rapidly in the coming years with higher sales levels.
2. Exposure to Bitcoin
Another reason why I think buying block stock right now is a smart idea is because of the company’s exposure Bitcoin. Cash App users can buy and sell Bitcoin directly from their mobile devices. To provide this service, Block charges a small transaction fee.
With the crypto market booming in 2021 and the price of Bitcoin hitting an all-time high of around $69,000 in November last year, this source of revenue was a huge boon for the blockchain business. In 2021, Bitcoin’s gross profit (the true amount a block actually makes in transaction fees) has grown 124% year over year to $218 million. However, this figure has decreased in 2022. In the first nine months of this year, Bitcoin’s gross profit is 12% lower than in the comparable period of 2021.
I see Bloc’s Bitcoin business as a positive sign that as the Federal Reserve begins to slow down its rate hike path, and eventually holds interest rates steady (or even starts lowering them in the future), this segment is set to boom again.
Investors will begin to gravitate towards cryptocurrencies and Bitcoin in particular. This should bring more users to the Cash App platform, who may eventually find themselves using other features of the personal finance tool.
3. Look at the assessment
This is the final argument I present for why blocks are a good investment today Attractive valuation. After peaking at $281.81 per share in August 2021, Block’s stock has fallen sharply by 78% (as of Dec. 16). As a result, it now trades at a Price-to-Sale (P/S) multiples of 2. Not only is this valuation significantly lower than Block’s historical average P/S ratio of 6.5, but it’s also close to the stock’s cheapest valuation ever (a P/S of 1.7).
So, it’s probably safe to say that the pessimism surrounding business today is near an all-time high. This makes sense given how much tech stocks, especially fintech stocks, have grown in investor favor this year. In the long run, though, I think this is a great company to own.
Wall Street consensus analyst estimates, which should mostly be taken with a grain of salt, can provide some context. In 2026, these forecasts call for Block’s earnings per share to be $3.96. This suggests that the stock currently sells for around 16 times the estimated figure. The block will still post double-digit top-line growth, and profits could rise, so the multiple should be significantly higher than 16 over the five-year period.
This creates a favorable setup for investors.
