We recently compiled a list of the 10 Undervalued Stocks to Invest in According to Goldman Sachs. In this article, we are going to take a look at where Block, Inc. (NYSE: XYZ) stands against the other undervalued stocks favored by Goldman Sachs.
Sell-side analysts identify undervalued stocks by conducting thorough fundamental analysis and examining financial metrics like revenue, earnings, debt levels, and growth potential. They use valuation techniques such as complex DCF models or P/E ratios to compare a company’s performance against industry peers to spot discrepancies between stock price and intrinsic value. Goldman Sachs, known for its reputation and expertise, leverages advanced proprietary data models and quantitative methods to refine its recommendations, helping institutional investors identify high-potential stocks early before their mispricing gains broader market attention. Another important competitive advantage of GS is their large scale and vast team of analysts, which allow them to cover a wide range of companies in a timely manner.
READ ALSO: 13 Most Undervalued NASDAQ Stocks To Buy According To Hedge Funds
Unlike other major banks, Goldman Sachs is also known for its highly skilled macro research team, which is known for occasionally making bold, out-of-consensus predictions regarding the broad market. One relatively recent example is an October 2024 paper in which the Goldman Sachs team expressed a rather pessimistic and significantly out-of-consensus view that the US stock market will likely deliver mediocre returns in the next 10 years, driven by high valuations and elevated market concentration. More precisely, Goldman Sachs estimated that the main US stock market index will only deliver a nominal annualized return of 3% during the subsequent 10 years, significantly below the 13% during the previous decade. Here’s a snippet of the report that sheds light on the causes of such potentially low future returns:
“Market concentration is particularly important today because the US equity market is currently near its highest level of concentration in 100 years. The intuition for why concentration matters for long-term returns relates to growth in addition to valuation. Our historical analyses show that it is extremely difficult for any firm to maintain high levels of sales growth and profit margins over sustained periods of time. The same issue plagues a highly concentrated index. As sales growth and profitability for the largest stocks in an index decelerate, earnings growth and therefore returns for the overall index will also decelerate. The current extremely high level of market concentration is one of the main drags on our return forecast. If our model were to exclude this variable, our baseline return forecast would be roughly 4 pp higher (7% rather than 3%)”
While the aforementioned findings are bad news for passive investors who are long the entire US equity market through ETFs and other broad market instruments, Goldman Sachs claims that peak market concentrations have historically been followed by prolonged periods of declining concentration. This trend has materialized through the equal-weight index—dominated by small caps—outperforming the value-weight index, which is largely driven by large caps. In other words, the key takeaway for investors is that pockets of outperformance will always exist, and hidden opportunities should be observed with smaller caps and underfollowed names. The Goldman Sachs team of analysts covers a wide array of stocks and regularly issues reports with ‘Buy’ ratings that could potentially uncover undervalued stocks to invest in. Their deep research and industry expertise provide valuable insights that allow investors to take advantage of market inefficiencies.
People using the Cash App paying for goods and services, highlighting the impact the of the company’s payment tools.
Our Methodology
To compile our list of 10 undervalued stocks we analyzed recent stock reports issued by Goldman Sachs analysts with a “Buy” rating. For each stock, we included the forward P/E ratio and ranked the companies from most expensive to least expensive. We also include the number of hedge funds that own each stock.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).
Block, Inc. (NYSE:XYZ)
Forward P/E ratio: 11.15
Number of Hedge Fund Holders: 81
Block, Inc. (NYSE:XYZ) is a financial technology company that provides digital payment, banking, and commerce solutions for businesses and consumers. The company operates through key segments, including Square, which offers point-of-sale and financial services for merchants, and Cash App, a peer-to-peer payment platform with banking and investing features. XYZ also owns Tidal, a music streaming service, and TBD, an open developer platform focused on decentralized financial solutions. The company serves small businesses, enterprises, and individual consumers, leveraging technology to enhance digital transactions, financial accessibility, and cryptocurrency integration. XYZ ranked fourth on our recent list of 10 Best Growth Stocks Under $100 to Buy Now.
Block, Inc. (NYSE:XYZ) experienced substantial growth in 2024, generating $8.89 billion in gross profit – an 18% increase from the previous year. Both Square and Cash App contributed to this expansion, with Square’s revenue rising by 15% and Cash App’s by 21%. Customer engagement remained strong, as gross profit retention for both platforms exceeded 100%. The company’s Gross Payment Volume (GPV) maintained upward momentum, increasing 10% year over year in the fourth quarter, with US growth accelerating by 200 basis points to 6.9%. Meanwhile, Cash App’s active paycheck deposit users reached 2.5 million in December, reflecting a 25% annual increase. Operational efficiencies significantly boosted profitability, with Adjusted EBITDA surging 69% to $3.03 billion and Adjusted Operating Income climbing over 4.5x year over year to $1.61 billion.
Looking ahead to 2025, Block, Inc. (NYSE:XYZ) projects at least 15% gross profit growth, targeting a minimum of $10.22 billion. The company plans to enhance Cash App’s functionality by expanding Cash App Borrow, integrating Afterpay with the Cash App Card, and ramping up marketing efforts. XYZ is expected to see continued GPV and gross profit improvements, driven by customer retention and acquisition initiatives. The company remains committed to disciplined expansion while controlling costs, keeping its workforce under 12,000 employees. Profitability remains a priority, with the company aiming for $2.1 billion in Adjusted Operating Income, equating to an approximately 21% margin. With a forward P/E ratio of 11.15, XYZ is one of Goldman Sachs’s undervalued stocks.
Overall XYZ ranks 3rd on our list of the 10 undervalued stocks to invest in according to Goldman Sachs. While we acknowledge the potential of XYZ as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than XYZ but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
