In September 2020, Ark Invest, led by Cathie Wood, projected that fintech giant Block (NYSE: SQ) would soar to $375 per share by 2025. At the time, this forecast suggested a 150% upside. However, since then, Block’s stock has plummeted by over 50%, bringing the current price down to $62 per share. This means that Ark’s target now indicates a whopping 505% potential upside.
Despite this significant drop, Wood and her team remain optimistic about Block’s future. Today, Block stands as the fourth-largest holding in Ark’s portfolio, representing 5.4% of their invested assets, compared to being the fifth-largest at 5.6% back in September 2020.
Is Block Set for a Turnaround?
Block has structured its business around two main product ecosystems: Square and Cash App. The Square ecosystem includes a range of hardware, software, and banking services designed to support merchants in both physical and digital sales environments. This integrated approach sets Square apart from traditional, fragmented payment processing solutions typically used by small and medium-sized businesses.
Similarly, Cash App provides a comprehensive platform where users can save, spend, borrow, and invest money. This all-encompassing nature simplifies personal finance management, resonating well with consumers. Notably, Cash App ranked as the ninth-most downloaded mobile app in the U.S. last year and the most downloaded financial app.
In its first-quarter financial results, Block exceeded expectations on both revenue and earnings. Total gross profit rose by 22% to $2 billion, driven by a 25% increase in Cash App and a 19% increase in Square. Non-GAAP net income skyrocketed by 98%, reaching $0.85 per diluted share.
Square Ecosystem Performance
Square has made strides in monetizing larger and international sellers. Mid-market sellers—merchants with an annualized gross payment volume (GPV) of at least $500,000—represented 39% of Square’s GPV in the first quarter, up from 38% the previous year. International sellers contributed 13% of Square’s gross profit, up from 11% last year.
However, total Square GPV grew by only 9% in the first quarter, a notable slowdown from 17% growth the previous year. This sluggish GPV growth led to a modest 9% increase in transaction revenue. Nonetheless, this was balanced by a 29% rise in subscription and services revenue, bolstered by products like Square Loans and Square Debit Card.
Cash App Ecosystem Performance
Cash App continues to attract and engage more users. The number of monthly transacting users grew by 6% to 57 million in the first quarter, with average inflows per user increasing by 11% to $1,255—a sequential acceleration from 8% growth in the fourth quarter. This is encouraging as Block focuses on boosting paycheck deposit adoption and inflows per active user to establish Cash App as a primary banking platform.
Moreover, the number of Cash App Card users increased by 20% to 24 million, while buy now pay later (BNPL) volume surged by 25% compared to the previous year. Cash App Pay volume also jumped by 40% compared to the prior quarter, indicating deeper engagement across its suite of financial services.
Reconciling Ark’s Ambitious Valuation with Reality
In 2020, Ark Invest’s prediction of $375 per share by 2025 hinged on trailing-12-month (TTM) gross profit growing at 53% annually to hit $15.7 billion by the fourth quarter of 2025. However, TTM gross profit has only grown at 40% annually, reaching $7.9 billion through the first quarter of 2024. To meet Ark’s target, Block would need to double its TTM gross profit in the next seven quarters, necessitating a substantial acceleration.
Additionally, Ark’s target implies a market capitalization of $182 billion, translating to a valuation of 11.6 times gross profit. Currently, investors are valuing Block at just 4.9 times gross profit, far below Ark’s expectation.
Potential for a Market-Beating Turnaround
Block’s stock, trading at $150 per share when Ark released its model, has since fallen by 57%, while the S&P 500 (SNPINDEX: ^GSPC) has climbed by 64%. Despite this, Block could still be a comeback story. The company has tapped less than 5% of its $205 billion addressable market in gross profit. Wall Street anticipates Block’s earnings per share will grow at 41% annually over the next three to five years. This growth prospect makes the current valuation of 78.7 times earnings appear reasonable.
Moreover, Block’s price-to-gross-profit multiple of 4.9 is a significant discount compared to its three-year average of 11.6. From this vantage point, Block has the potential to outperform the market in the coming years.
Key Takeaways
- Ark Invest remains optimistic about Block despite a significant drop in share price.
- Block’s integrated ecosystems, Square and Cash App, are showing signs of deeper user engagement and growth.
- Ark’s initial valuation model may have been overly ambitious, but Block still has potential for substantial upside.
- Wall Street’s growth expectations and current valuation suggest Block could be a market-beating investment.
Conclusion
While Ark’s initial forecast for Block may have been overly optimistic, the fintech company still presents a compelling growth story. With a solid position in Ark’s portfolio and significant growth potential, Block could indeed turn around and reward investors in the years ahead.