10. Block, Inc. (NYSE:SQ)
Short % of Shares Outstanding: 1.73%
Number of Hedge Fund Holders: 59
Forward Price to Earnings Ratio as of August 28: 18.83
Block, Inc. (NYSE:SQ) is a financial services and digital payment company, that develops payment platforms for small and medium business owners allowing them to digitally manage their sales and finance operations.
It offers Square and Cash App. The Square app allows businesses to manage retail, appointments, Points of Sale, card payments, and much more digitally through their computers. Moreover, the Cash App allows peer-to-peer transactions such as payments, bitcoins, and investment brokerage.
The interconnectedness of Block, Inc.’s (NYSE:SQ) business model gives it a competitive edge over the market. Both business segments make their customers dependent on the platform thereby contributing to constant revenue growth. Moreover, as a result of its services to a large number of businesses, the company has a bank of data that also gives it a strategic edge to grow its business subsequently.
SQ is an investor’s favorite stock. It was held by 59 hedge funds in Q2 2024, with total stakes worth $2.68 billion. ARK Investment Management is the top share holder of the company with a position worth $534.7 million.
Both the business segments proved their profitability during the fiscal second quarter of 2024. The Square segment gross profits were up 15% year-over-year at $923 million and the Cash App profit amounted to $1.3 billion improving 23% year-over-year. As a result, the combined profit reached $2.23 billion indicating a robust 22% growth when compared to the previous year.
Management has set its bar high in terms of growth. It stays committed to the “Rule of 40”, which entails that the sum of a company’s annual revenue growth and its profit margins should be equal to or greater than 40%.
As of the second quarter, Block, Inc. (NYSE:SQ) improved its adjusted EBITDA to $759 million, increasing more than twice year-over-year. Moreover, its twelve-month trailing free cash flow in June was recorded to be $399 million, twice when compared to the previous year,
Block, Inc. (NYSE:SQ) strong cash generation capability combined with its ecosystem of growth from both segments offers significant room for growth. The company also presents an attractive entry point. It is trading at 19 times its forward earnings, while the market average sits at 24. Moreover, its earnings are also expected to grow by 100% to reach $3.6 during the year. Thereby making it an undervalued tech stock to buy now.
Baron FinTech Fund stated the following regarding Block, Inc. (NYSE:SQ) in its Q2 2024 investor letter:
“Block, Inc. (NYSE:SQ) provides point-of-sale technology to small businesses and operates the Cash App ecosystem of financial services for individuals. Shares gave back gains from earlier this year despite reporting strong quarterly results and raising full-year guidance. In the first quarter, gross profit grew 22% and EBITDA grew 91%, both exceeding Street expectations. Given the strong start to the year, second-quarter guidance of 16% to 17% gross profit growth may have disappointed some investors. Management remains committed to a “Rule of 40” investment framework in 2026 with at least mid-teens gross profit growth and a mid-20% operating margin. We continue to own the stock due to Block’s long runway for growth, durable competitive advantages, and innovative product offering.”
