In the battered fintech space, Block (NYSE:SQ) stands out to me as an intriguing turnaround play over the next few years. While the stock remains deeply out of favor today, I believe SQ stock is poised to soar as sentiment improves for this stock, the sector, and the market more broadly.
There’s no denying Block has been obliterated, with shares down a painful 83% from their highs. However, this brutal sell-off has left SQ stock incredibly cheap for long-term investors. Let’s look into why that’s the case.
Should I Buy SQ Stock or PYPL Stock? Here’s the Answer
Many would argue PayPal (NASDAQ:PYPL) is the better buy right now, after its own 82% drubbing. Yet, in my view, Block gives you more upside in the coming years, as it not only offers better growth prospects but is on the cusp of pumping out consistent profitability.
Analysts expect Block to turn profitable in 2023 after years of losses. This would make SQ stock far more investable to many investors who previously avoided it due to the company’s lack of profitability.
With Block on the verge of sustainable GAAP profits, I believe the market will start appreciating how inexpensive this stock truly is. The stock’s forward price-earnings ratio stands at just 26-times based on 2023 earnings estimates. However, if we peer out to 2032 projected profits, the multiple falls below 3-times earnings.
That’s an astonishingly low multiple for a company growing earnings at a ~25%-plus CAGR this decade with leading positions in digital payments and other disruptive technologies like crypto. Thus, Block offers tremendous value, in my opinion, if you adopt a long-term mindset.
That said, the stock’s $80 consensus price target seems reasonable to me in the next 12 months. I wouldn’t be surprised to see SQ stock eclipse $100 in 2023-2024 if profitability comes in better than expected.
But over the next decade, I believe Block can potentially deliver multibagger returns from today’s depressed levels. This is a high-quality company that simply got caught up in the vicious tech sell-off. Once positive catalysts emerge, Block should soar.
Block’s Core Business Looks Solid
The shift to digital wallets and cashless transactions remains a strong secular trend. That’s why Block is superbly-positioned to capitalize through its Square merchant services and wildly popular Cash App. Cash App had 54 million monthly transacting users as of Q2 2023, up 15% year-over-year. The network effect with this business is immense, as more consumers adopt Cash App to send money to friends and family. This drives more merchants to accept Cash App Pay.
Meanwhile, Square’s seller ecosystem empowers merchants of all sizes to start, run, and grow their businesses with advanced software, financing, and payment capabilities.
Block’s synergy between merchants and consumers positions it exceptionally well, in my view. The company effectively serves both sides of the transaction. Admittedly, Block’s growth is moderating from the stimulus-fueled surge during the pandemic. But with the economy reopening, I expect steady growth to continue.
Square GPV rose 12% year-over-year, while total net revenue surged 26% to $5.5 billion. These are hardly sluggish figures for a company of this scale. Thus, muted growth from 2020-2021 levels does not concern me.
Critically, Block generated $384 million of EBITDA (adjusted) despite these profitability fears. In fact, Block guided for a full-year 2023 adjusted EBITDA of $1.5 billion. This profitability milestone is key, and with Block now on the cusp of sustainable green numbers, the stock deserves to trade higher, in my opinion.
The Bottom Line
Don’t sleep on this fintech juggernaut while it remains beaten down. Block is poised for massive returns in the coming years if you buy before the turnaround gains steam. I expect profitability to be the magic catalyst for the company, sending SQ stock soaring.
Obviously, risks exist if the economy worsens. But with shares trading at just 26-times forward earnings and boasting promising cash flow prospects, Block appears primed for a doubled stock price in due time. I rate SQ stock stock a “buy” below $50 per share.
On the date of publication, Omor Ibne Ehsan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.