Formerly known as Square, Block’s (NYSE:SQ) product suite developed a way for merchants to accept credit cards using their mobile phones.
It has evolved to grow into a large-scale financial ecosystem for individuals and small businesses now. The company now processes card payments at an annualized rate of well over $100 billion. It has recently launched its own banking subsidiary (Square Financial Services), and it has a thriving small business lending platform.
Block had a gross profit growth of 34% in quarter one and was able to generate free cash flows. Currently, Block seems undervalued as it is trading lower than the lower term average for a long time, almost 76% down from its all-time high a year ago.
Block has remained a high-growth stock and starting to generate profitability as well as free cash flows. In the first quarter of this year, free cash flow was $188 million, compared to negative $63.3 million a year ago.
In early 2022 Block purchased buy now, pay later (BNPL) outfit Afterpay to increase individual user activity, helping merchants to convert more paying customers and deepen their relationship with merchants.
While we consider Block as a growth stock because it is still scaling its business sacrificing profit margin for the business expansion, the current stock price might be reasonable for such stock. Free cash flow (FCF) generated over the last trailing-12-month period was $965 million, which means that at Thursday’s closing price, the stock trades at just under 40 times its ratio of enterprise value to FCF.
Primarily due to non-cash expenses like depreciation and amortization of intangible assets the net income is still negative. It can’t be titled a value stock considering its financial metrics, but having the high growth momentum the current stock price is not unreasonable.
Investors should be aware of the volatility of the stock and should incorporate this stock as a part of a diversified well planned portfolio rather than investing solely in it.