Is Block Stock a Buy?

This beaten-down stock has compelling attributes, but one strategic focus might dissuade some investors.

Shares of Block (SQ -1.96%) have been drawing attention for all the wrong reasons lately. They are currently 77% off their all-time high, a milestone that was reached in August 2021 during that year’s raging bull market.

I’m sure investors are wondering if this fintech stock can one day reclaim its former glory. Is Block a smart buying opportunity right now?

Driving profitable growth

You wouldn’t be able to tell from the stock’s performance, but Block continues to grow at a solid clip. After posting a gross profit gain of 25% in 2023, the company reported a 22% increase in the first quarter of 2024 (ended March 31). Both Square and Cash are expanding at double-digit clips.

It’s not a surprise that Block’s main focus has been on driving greater growth by introducing new products and entering new markets. Square, which provides various tools for merchants, is staring at a $130 billion gross profit total addressable market (TAM). And Cash App, a peer-to-peer payment service that also offers basic banking services, has a gross profit TAM of $75 billion. These two segments are currently tiny compared to their long-term potential.

However, management has emphasized right-sizing operations, cutting costs, and limiting hiring activity. This is helping Block become a more fiscally responsible business. Adjusted operating income is expected to total $1.3 billion in 2024, up from $351 million last year.

Block and Bitcoin

Jack Dorsey, Block’s co-founder and CEO, has often expressed his bullishness on Bitcoin. He believes that as the internet evolves and becomes an even more important part of our lives, there will be a clear need for a native currency. In his mind, Bitcoin is the solution.

Besides buying Bitcoin for Block’s balance sheet, the business is pursuing various initiatives as they relate to the world’s most valuable digital asset. Cash App has facilitated the buying and selling of Bitcoin since 2018. This contributed 3.8% of the overall company gross profit in Q1.

Then there are under-the-radar segments like TBD and Spiral that are working on ways to boost Bitcoin usage and adoption, whether that’s in daily payments or cross-border transactions. Creating hardware, like a Bitcoin wallet and mining equipment, is also a focus.

Investors can’t ignore the fact that Bitcoin is going to be a more important part of Block’s business in the years ahead. So as you think about what to do with the stock, factor this into your decision-making process. If you’re someone who isn’t bullish on Bitcoin, then maybe Block doesn’t belong in your portfolio.

Low valuation

Since the shares have gotten crushed in recent years, they aren’t expensive. Block trades at a price-to-sales ratio of just 1.8 today. That’s a sizable 68% discount from the historical average. It’s safe to say that pessimism still characterizes the narrative of this business.

Throughout its history, Block hasn’t been consistently profitable. But as I noted earlier, management’s focus on efficiency could lead to a more financially sound enterprise looking ahead.

Therefore, we can look at the price-to-earnings ratio as a valuation tool. According to analysts’ consensus estimate, Block is projected to report adjusted earnings per share of $5.31 in 2026. Based on the current stock price of $66, shares trade at just 12 times that expected figure. Take the forecast with a grain of salt, but this shows the upside potential as the bottom line hopefully starts to expand.

I believe Block possesses the characteristics to be a winning stock over the next few years, so investors should consider buying shares today.

Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin and Block. The Motley Fool has a disclosure policy.

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