1 Growth Stock Down 77% to Buy

The Square ecosystem is growing rapidly.
International expansion is still in its early stages.
Cash App is a leader in its space.

Don't let the stock's sell-off distract from the huge market opportunity Block is capitalizing on.

When it comes to fintech stocks, Block is one of the best-known companies in the public markets, although more may know it by its former name, Square. What began as a company with a simple device that could be plugged into the headphone jack of a smartphone to accept credit card payments has blossomed into a $37 billion company with dozens of products and services in a little more than a decade.

Unfortunately for the company and its shareholders, Block has had a rough year, with shares down more than 77% from their mid-2021 high. The question investors need to answer is whether that drop in share price is warranted based on business performance or merely a consequence of the broader sell-off that has led to the currentbear market. Let's dive into why Block presents a buying opportunity for investors right now.

The Square ecosystem is still expanding

In the first quarter of 2022, Block reported $1.3 billion ingross profit. Of that amount, $661 million was attributable to the Square ecosystem. The Square reader was the original product when the company was formed and has developed a software-based ecosystem that supports sellers in every facet of their business. Square's gross profit in the quarter represented a 41% increase year over year and a two-year compound annual growth rate (CAGR) of 36%. This is strong growth that shows the continuing market penetration and increased spending of existing users.Block is focused on three strategic priorities with Square. Two of those, to expand the omnichannel software offerings and to grow upmarket into larger sellers, present compelling opportunities for growth and expand the total addressable market (TAM) for Square. However, it's Block's push into new international markets that I think is the most interesting for future growth.

In Q1 2022, international gross profit for Square reached $78 million, up from $39 million in Q1 of 2021. International gross profit now accounts for 12% of total gross profit, an increase from 8% one year ago. This growth is more impressive considering that Square only operates in eight countries outside the U.S., three of which came online in 2021 or 2022. Global product awareness for Square is still below 50%, so there's a clear runway for growth if Block is able to continue its successful international expansion.

Cash App has the advantage of integration

Most U.S. consumers are probably aware of peer-to-peer payment apps like Cash App. What makes Block's offering in this space unique is its integration with the rest of its products, like Square, Block's buy now pay later (BNPL) service AfterPay, and the music streaming platform TIDAL.

Cash App accounted for $624 million of Block's total gross profit in Q1, representing an increase of 26% year over year and a two-year CAGR of 85%. This isn't surprising considering that Cash App has grown to approximately 80 million annual active accounts.

Importantly, the cost of acquiring these customers is staggeringly low. Cash App's acquisition cost for a new user is $10, compared to $30 to $50 for a neobank (online-only bank) and $300 to $600 for retail banks. This results in a three-year return on investment (ROI) of more than six times for Cash App.

As mentioned above, Cash App is meant to integrate with all other Block products. The app also has access to purchasing cryptocurrencies and stocks, in addition to the peer-to-peer payments most customers utilize.

Afterpay and TIDAL build upon what came before

The recent acquisitions of Afterpay and TIDAL further build upon Block's ecosystem of products. With AfterPay, Cash App, and Square, users now have access to a BNPL service that is not only a benefit to users but also brings in a whole new customer base for Block to then monetize in other ways.

The music-streaming service TIDAL is trying to do for up-and-coming musicians what the Square ecosystem does for sellers. By helping these artists navigate the business side of their industry, TIDAL hopes to utilize its Square and Cash App ecosystems to not only support these artists but have them also be part of the whole Block family of products.

A growing market opportunity for Block

Block estimates its TAM to be $120 billion for Square and another $70 billion for Cash App. Investors should always take a company's TAM estimates with a grain of salt, but even taken with a healthy-sized grain of salt, it's hard to deny there's plenty of growth available to Block.

Block currently has aprice-to-salesratio of 1.9, which is just about at an all-time low. The market sell-off has made Block's shares pretty hard to ignore at this valuation. There's little doubt that Block isat the forefrontof where commerce and banking are heading. At this price, I think Block is an absolute buy right now.

source: fool

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