Popular investor Cathie Wood has recently been the subject of a lot of heat over her famous Ark Innovation ETF (ARKK -5.41%)which has fallen 54% since the start of 2022. As its name suggests, the exchange-traded fund is comprised of high-growth stocks, most of which have been absolutely demolished in response to the gloomy macro backdrop.
However, as long-term investors, we should not be too caught up in short-term stock price fluctuations. After all, if you look at Wood’s portfolio, you’ll notice that many promising companies are down significantly from their highs. To me, this is a clear buy signal, and rather than waiting to buy, investors should capitalize on the recent correction by buying high-quality company stocks today.
Let’s take a look at one of the best stocks in Wood’s Ark Innovation ETF that investors should consider buying right now.
Block is one of the leading fintech stocks
Fintech Stock To block (SQ -6.20%) has plunged 55% year-to-date and ranks fifth in Wood’s Ark Innovation ETF, accounting for 4.8% of the overall portfolio. The company’s business mainly consists of two parts. It has its Square ecosystem, which combines hardware and software to help small businesses run more efficiently. And then it has Cash App, a versatile mobile payment platform that enables peer-to-peer transactions, cryptocurrency trading, tax reporting, and debit card services, among other things. Block also completed its acquisition of Afterpay earlier this year, a buy-it-now, pay-later service similar to Affirm Assets.
In the second quarter, Block’s revenue fell 5.9% year-over-year to $4.40 billion, and it suffered a net loss of $209.3 million. Revenue from its Square ecosystem grew 32% to $1.73 billion, or 39% of total sales. Meanwhile, revenue from its Cash App ecosystem fell 21% to $2.62 billion, accounting for 59% of its revenue. So what’s going on with Cash App? Since consumers can buy and sell Bitcoin on the platform, Cash App revenue is significantly impacted by fluctuations in demand for cryptocurrency. Given that Bitcoin is down 55% year-to-date and demand has eased, the fintech company’s revenue has taken a big hit.
Block makes money as an intermediary in Bitcoin transactions: it buys the cryptocurrency, applies a small margin, and then resells it to its customers. It’s a very low-margin business, so looking at the company’s gross profit is a better indicator of overall growth. In the second quarter, its gross profit rose 29% year over year to $1.47 billion. Square and Cash App’s gross profit were both up 29% from the same period a year ago. So, analyzing Block’s financial situation in more detail, it is quite clear that growth remains strong. Of course, it’s worth noting that the fintech specialist isn’t always profitable yet, which is another reason why the stock is struggling in the current economic environment. But given its steady growth and diverse revenue streams, I think Block is well positioned to become a winner in the fast-growing fintech space.
It’s time to buy a block
Small businesses represent 44% of economic activity in the United States. According to Allied Market Research, the fintech market is expected to grow at a compound annual growth rate of 20.3% through 2030, to $698 billion. Between Square and its nascent Cash App platform, Block looks perfectly positioned to be a key player in transforming the financial services industry in the years to come.
Currently, the stock is posting a price/sales multiple of 2.4, well below its five-year average of 7.6. So, Block’s bright future combined with its updated valuation make it a fantastic buy at the moment. Over the long term, this is a stock that I believe could deliver monumental gains for cautious investors. So let’s be patient for now.
Luke Meindl has no position in the stocks mentioned. The Motley Fool holds positions and endorses Affirm Holdings, Inc., Bitcoin, and Block, Inc. The Motley Fool has a Disclosure Policy.