Fintech companies use technology to deliver financial services and solutions. These companies use cutting-edge tech - which could include artificial intelligence (AI), machine learning, blockchain, data analytics, mobile apps, and more - to improve and simplify various facets of the finance business.
The fintech industry has grown rapidly in the last couple of years, and now offers more than traditional financial services. Among the many rising stars in the fintech space, Block (SQ), formerly known as Square, has piqued Wall Street’s interest, and the consensus rating among analysts is a “strong buy.”
Founded in 2009, Block has evolved from a simple mobile payments platform into a multifaceted financial services company. It now provides a wide variety of products and services, and is rapidly expanding its business. Block stock has gained 5.5% year-to-date, compared to the S&P 500’s ($SPX) gain of 8.3%.
Let's look at its most recent fourth-quarter results to see why this fintech stock is worth buying right now.
What Is Driving Block’s Exceptional Growth?
Block's ecosystem is made up of two segments: Cash App and Square, both of which are driving the company towards an exceptional future. Notably, the Cash App assists consumers in managing their money by offering a diverse range of financial products and services. Square, on the other hand, offers 30 distinct products and services (software, hardware, and financial services) to help people start, manage, and grow their businesses.
In the fourth quarter, the Cash App generated $3.9 billion in revenue and $1.19 billion in gross profit. Meanwhile, Square's revenue and gross profit of $1.81 billion and $828 million, respectively, increased 12% and 18% year on year.
For the full year, Cash App and Square’s revenues increased by 33% and 12%, respectively. The company's strategic efforts to introduce new offerings into each segment while gaining and retaining customers have resulted in significant growth in both segments. As of December 2023, Cash App had 56 million monthly transacting active users, a 9% increase from 2022.
This exceptional growth resulted in an 81% year-on-year increase in adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) to $1.8 billion. One of the company's primary goals is gross profit retention, which refers to its ability to retain customers in the face of a challenging macroeconomic environment and rising competition. Notably, gross profit increased by 25% over 2022.
The company also intends to launch two new ecosystems, including TIDAL and Bitcoin (BTCUSD). Block acquired TIDAL, a global music and fan platform, in 2021. These ecosystems will help the company diversify its product and service offerings. With the growing demand for cryptocurrency and digital finance, Block's chances of getting bigger from its current $50.2 billion market cap are increasing.
Turning to guidance, management expects gross profit to range between $2 billion and $2.02 billion in the first quarter, with adjusted EBITDA increasing by 57% year on year. Management predicts a gross profit of $8.65 billion and adjusted EBITDA of $2.63 billion for the full year 2024, and expects to adhere to the “Rule of 40” path to outperform their initial guidance for the full year.
For comparison, analysts predict Block’s 2024 revenue and earnings could increase by 14% and 84%, respectively. In 2025, revenue and earnings are predicted to rise by 11.9% and 27.8%, respectively. Block is currently trading at 19 times forward earnings, which appears reasonable, given the scope of the digital finance industry.
What is Wall Street’s View on Block Stock?
Turning to Wall Street, Block stock is a “strong buy” in the analyst community. Out of the 39 analysts covering SQ, 29 have a “strong buy” recommendation, two say it's a “moderate buy,” seven rate it a "hold,” and one suggests a “strong sell.”
Block is trading close to analysts' average price target of $85.31, which implies potential upside of about 4.4%. Its Street-high price target of $110 suggests an upside of 34.6% in the next 12 months.
Is Block Stock a Buy Now?
While many purchases are now cashless worldwide, most countries continue to use cash for day-to-day transactions. This means there is a lot more room for the industry to grow. As the digital finance industry expands, fintech companies such as Block will greatly benefit from AI.
I believe Block will easily reach its Street-high target price this year. As the company continues to innovate and diversify its offerings, this growth stock makes a strong case for long-term investment.
On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
