Cathie Wood, the founder and CEO of Ark Invest, has built a formidable reputation by wagering on tech companies with significant growth potential. Among her top holdings is Block (NYSE: SQ), with her Ark Innovation ETF owning approximately $500 million in shares, accounting for roughly 6% of its entire portfolio.
There’s a lot to admire about Block stock. If its growth potential is realized, shares could easily double, triple, or even quadruple in value. Why are growth investors like Cathie Wood betting so heavily on the company? Here are three major factors.
Block’s High-Quality Exposure to Bitcoin
Strategically buying stock in Block presents one of the simplest means to gain exposure to the unprecedented growth of cryptocurrencies such as Bitcoin.
Formerly known as Square, the company primarily generated revenue by assisting small and medium-sized enterprises in processing payments and conducting various business-related activities, including scheduling and inventory management. It also placed a strong emphasis on mobile payments through its Cash App. You might have unwittingly utilized its services; millions of small businesses adopted the company’s phone and tablet accessories, allowing the acceptance of credit and debit card payments with minimal investment.
However, towards the end of 2021, the company rebranded itself as Block to signify its expanding ambitions to establish a significant presence in the blockchain industry. Presently, the company is deeply focused on capitalizing on the crypto boom. For instance, it owns Spiral, which develops open-source apps to expedite Bitcoin adoption; TBD, which fosters developer ecosystems to simplify Bitcoin-based development; and Cash App, which was broadened to enable anyone to transact with conventional currencies or cryptocurrencies.
If the demand for cryptocurrencies continues to surge, Block is well-positioned to reap substantial benefits.
The Path to Block’s Eventual Profitability
The majority of high-growth companies grapple with profitability as they aim to swiftly reinvest earnings for expansion. This is also true for Block, or at least it was. Since 2016, the company has reported negative quarterly earnings a majority of the time. This might have been acceptable for a while, but it’s only sustainable as long as the market believes that the company is judiciously reinvesting its capital.
Within the past 12 to 24 months, numerous high-flying growth stocks witnessed substantial declines in their share prices as the market grew weary of supporting loss-making enterprises. After recording one of its largest quarterly losses in history last year, Block stock was also at risk, although profits might soon be within reach.
In the latter half of 2023, Block CEO Jack Dorsey outlined a new plan that centered on achieving profitable growth. For instance, the company intended to cap its headcount, wind down some unprofitable operations, and concentrate on a more efficient marketing spend. Dorsey is confident that, within two years, Block can not only return to profitability but also attain long-term profitability margins that it has previously struggled to sustain. With around 11% ownership of Block’s shares – the majority of his multibillion-dollar wealth – Dorsey is undoubtedly incentivized to deliver on his promises.
Block Shares: Appealingly Affordable
Given its focus on high-upside opportunities, Block stock has seldom been offered as a bargain. At times, shares traded at as high as 15 times sales. Investors who weathered the wild fluctuations have fared quite well, with shares appreciating by roughly 400% in value since 2016.
Currently, shares are trading near their lowest valuation in history, owing to the sell-off of high-growth tech stocks post the zenith of the COVID-19 pandemic. After this downturn, the stock is valued at just 1.8 times sales. Contrast this with its long-term average price-to-sales multiple of 5.9, and it appears to be quite a compelling deal.
SQ data by YCharts
High-growth stocks are notorious for their volatility. The market often develops a fondness for these companies, but when growth falters, valuation multiples abruptly plummet, pulling down share prices in their wake.
As Block’s long-term track record demonstrates, however, patient investors willing to endure the peaks and valleys can multiply their initial investment multiple times over just a handful of years. With the stock now trading at a deep discount to its history and with plenty of growth runway still ahead of it, it’s no wonder that high-profile investors like Cathie Wood remain heavily invested in Block.
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Ryan Vanzo has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin and 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.
