1 reason to invest in Block today and 1 reason to stay away

Block (NYSE:SQ) equities have experienced a lot of turbulence in recent months. The company’s pandemic-induced bull run lasted until late 2021, when Block’s stock price hit nearly $300 per share. Since then, shares of the fintech leader have plunged, leaving many investors wondering whether or not they should buy Block shares today.

Block stocks have fallen 55% over the past year amid a broader tech selloff tied to rising interest rates, inflation and concerns about Russia and Ukraine. The company’s fundamentals remain solid and its growth path is extremely promising. Many stocks have come back to earth after trading at all-time highs, making them more attractive investment opportunities than they were before.

Let’s explore a reason for and against buying Block stock right now.

Image source: Getty Images.

Buy Block because of its strong growth track

It’s hard to argue with Block’s growth, both historical and projected. While investors shouldn’t completely ignore Block’s revenue, they should primarily focus on gross profit. Indeed, Block sales are strongly influenced by fluctuations in the price of Bitcoin. (CRYPTO: BTC). In short, consumers can buy Bitcoin on Block’s Cash App platform. Acting as an intermediary, Block buys Bitcoin from private brokers and applies a small margin before selling it to Cash App users. Therefore, the company’s Bitcoin revenue is heavily influenced by customer demand and the cryptocurrency market price. That’s why we should focus more on gross profit – it’s a better indicator of the financial health and overall stability of the business. In 2021, Bitcoin revenue totaled over 50% of sales. However, it only accounted for 5% of the gross margin.

Now that I’ve explained that, let’s talk about Block’s spectacular growth. The company’s gross profit rose 62% year-over-year in 2021, to $4.42 billion. On the earnings front, Block’s non-GAAP (adjusted) EPS rose to $1.71, which translates to a monstrous 104% increase from a year ago. If Wall Street’s forecast is correct, we should expect solid earnings expansion from Block in the coming years. Analysts are modeling EPS of $4.22 for fiscal 2025, indicating average annualized growth of 22% over last year’s numbers.

Cash App continues to be the epicenter of Block’s growth story. Last year, Cash App’s gross profit grew 69% year-over-year to $2.1 billion. Originally designed to simplify peer-to-peer payments, Cash App continues to evolve into a do-it-all financial platform. Block’s Cash App ecosystem now competes with businesses in debit and prepaid cards, stock trading, tax reporting, digital wallets, and bitcoin exchanges, among other areas. It’s clear to me that Block intends to revolutionize the way people think about and engage with the financial services industry. There’s no doubt the company is making its name heard either – Block’s growth has been remarkable and all signs point to further success.

Don’t buy Block because of its valuation

I like what Block is doing from an operational standpoint, but its stock is still priced high. According to data from Morningstar, Block is trading at a price-earnings-to-growth (PEG) ratio of 3.28. Generally speaking, a PEG ratio above 1 indicates a stock is overvalued, but it’s not uncommon for high-growth companies like Block to post higher multiples. Even so, when you compare Block’s PEG ratio to peers like PayPal (NASDAQ: PYPL) , Visa (NYSE:V) and MasterCard (NYSE: MA) the company appears quite expensive.

PayPal, Visa and Mastercard have PEG ratios of 1.12, 1.59 and 1.58, respectively. This gives an average of 1.43, which is more than half of Block’s current PEG multiple. Don’t rush to buy Block shares today. Of course, the title is cheaper than six months ago, but it is still overvalued compared to its close competitors.

What am I doing today?

I am indifferent to Block as he is today. The best investments often occur when we are able to acquire fundamentally sound businesses at low cost. Block meets the first half of these criteria, but its valuation remains high relative to its industry peers. I think Block is a good company with huge upsides, but I’m staying away for now. If the time comes when Block’s valuation is more in line with its fundamentals, I will definitely consider starting a position in the stock.

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Luke Meindl owns PayPal Holdings. The Motley Fool owns and endorses Block, Inc., Mastercard, PayPal Holdings, and Visa. 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.


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