The average investor can easily find new investment ideas by following well-known asset managers. One of those managers is Cathie Wood, who heads up Ark Invest, an investment fund that focuses on disruptive and innovative businesses.
In the Ark Innovation ETF, the flagship product that the asset manager offers to clients, fintech enterprise Block (SQ -2.74%) is a top holding. As of Nov. 21, it's the eighth largest position.
Should you buy this top Cathie Wood stock while it trades below $100 per share?
Bullish on fintech
Cathie Wood and her team at Ark Invest are bullish on numerous technological trends. One of the areas the investment manager is optimistic about is the fintech industry. In particular, the excitement relates to how companies are offering holistic solutions to customers for all their financial services needs.
Block falls squarely into this investment theme. Ark Invest believes that in the future, the business' vertically integrated offerings, like digital wallets, bank accounts, and debit cards for consumers, and payroll, working capital, and bill pay for merchants, will result in a powerful and more widely used closed-loop payments system. Block is at the forefront of this trend.
Indicative of how much Ark Invest is bullish on the fintech niche, the firm offers the Ark Fintech Innovation ETF, which primarily focuses on these types of businesses. Block is the third largest holding in that fund, making up 6.3% of the assets.
Block's positive traits
Investors probably appreciate Block's growth potential. Through the first nine months of 2024, the company reported a 20% year-over-year increase in gross profit. Both of the critical segments, Square and Cash App, saw double-digit gains with this key performance metric.
On the merchant side, Square processed $59.9 billion in gross payment volume in the three-month period that ended Sept. 30. The segment continues to attract larger sellers.
On the consumer side, Cash App now has 57 million monthly active users. Management continues to drive further adoption of the Cash App Card, which can boost spending activity and, ultimately, the revenue and gross profit that Block generates.
Like many other tech-enabled companies in recent years, Block has made an effort to streamline its operations and drive greater efficiencies. We're seeing this play out right before our eyes.
The business posted $323 million in operating income in the third quarter. That's a massive reversal from the $10 million operating loss reported in the year-ago period. The leadership team upped their full-year 2024 guidance, which now calls for an adjusted operating margin of 18%.
In theory, Block's business model should scale up in a profitable manner. Large expense items, like product development and sales and marketing, should constitute a lower percentage of total revenue over time, showcasing operating leverage. Shareholders must pay close attention to this going forward to ensure the strategy is working.
Betting on earnings growth
Block shares were once some of the best-performing on Wall Street. From the company's initial public offering in November 2015 to the stock's peak in August 2021, the share price skyrocketed more than 2,000% higher. That gain was hard to beat.
It's been a totally different story since then. As of this writing on Nov. 21, the stock trades 67% off that all-time high. The market is adopting a more tempered view of the business and its prospects.
Investors looking to buy shares must pay a forward price-to-earnings (P/E) ratio of 25.9. That's very reasonable. However, the stock should only be purchased by those who believe the company's top- and bottom-line growth are set to continue at a solid clip.
Cathie Wood thinks this will be the case. Based on recent trends, I believe this is a likely outcome as well, which makes the stock look like a compelling buy below $100.
