Block (NYSE: SQ), which was previously known as Square, has faced a turbulent few months. Indeed, after reaching highs of $282 last August, the stock is currently priced at around $150. Over the past 12 months, it has also fallen over 30%. This could be due to the investor shift from growth stocks to value stocks, partly because of high inflation rates. But the company is still performing very well, and evidently has a ton of potential. So, should I buy Block shares now?
Revenue growth at Block has been tremendous over the past few years. For example, in 2020, the firm managed to record revenues of around $9.5bn, over a 100% increase from the year before. In the first nine months of 2021, revenues totalled around $13.6bn. If the company can meet analysts’ estimates of $18bn for the year, this would represent a rise of nearly 100%.
The firm has also managed to reach profitability, which distinguishes it from some other high-growth stocks. Profits are still extremely small though, as the firm continues to invest in itself.
It is also pursuing several opportunities that could help drive growth further. This includes a major focus on cryptocurrencies, which are seen by some as the future of finance. Block also recently announced that it was acquiring Afterpay in an all-share deal. This is a buy-now-pay-later platform, which will hopefully allow Block to capitalise on this massive-and-still-growing industry.
While the firm is growing at a great pace, there are many risks that could lead this stock to fall further. For one, Block is heavily reliant on Bitcoin. Indeed, in the third quarter, total revenue was $3.84bn, and nearly half of this came from Bitcoin — that is, the amount of Bitcoin that is sold to customers. Nonetheless, if the price of Bitcoin falls, this will decrease both its revenues and profits. Because the cryptocurrency is an extremely volatile investment, this increases the risks associated with Block stock.
I also have my doubts regarding the acquisition of Afterpay. Although it was an all-stock deal, Afterpay was still valued at $29bn. This is despite the fact that revenue in the last fiscal year was only $693m. As such, this places the company on a price-to-sales ratio of around 42, which is extremely large. This means that if Afterpay’s growth takes a hit, especially if the buy-now-pay-later industry falls out of favour, it could end up being an extremely costly acquisition.
Would I buy this growth stock?
Block evidently has an extremely large number of positives, and its current growth is outstanding. With a forward price-to-sales ratio of around four, the shares also seem very reasonably valued. Nonetheless, due to its heavy reliance on Bitcoin, it’s also a very risky investment. Therefore, although I am tempted, I am not planning on buying just yet, as I feel the decline could continue.
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“The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of investment advice. Bitcoin and other cryptocurrencies are highly speculative and volatile assets, which carry several risks, including the total loss of any monies invested. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.”
Stuart Blair has no position in any of the shares mentioned. The Motley Fool UK has recommended Block, Inc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.