The market could be significantly undervaluing the growth potential of S&P/ASX 200 Index (ASX: XJO) tech stock Block Inc (ASX: SQ2).
Shares in the global buy now, pay later (BNPL) company, which acquired Afterpay in January 2022, have come under pressure in 2024.
The Block share price is down 0.4% in afternoon trade today, at $111.19.
That sees shares of this 'cheap' ASX 200 tech stock down 2.3% year to date.
The Block share price has increased 58% over the past 12 months. However, shares have been down 36% since the stock began trading on the ASX after its Afterpay acquisition.
With that said, here's why ECP Asset Management Global Growth Fund portfolio manager Justin Warton believes Block shares are significantly undervalued by the market. (His fund owns shares in Block.)
A 'cheap' ASX 200 tech stock
According to Warton (courtesy of The Australian Financial Review), the ASX 200 tech stock is the most undervalued company his fund currently holds.
"Block is a standout example of a company being undervalued by the market," he said.
Warton continued:
The shares are broadly flat since the end of 2022, which at the time wasn't an especially demanding valuation. Meanwhile, the company continues to compound gross profit and sustainably cut operating costs – things that weren't in the price three years ago.
Block is now trading on a high-teens multiple of next year's earnings, which we think is just too cheap.
Warton also pointed to a number of Block's growth strategies as reasons the stock is simply too cheap at current valuations.
According to Warton:
Chief executive Jack Dorsey has also laid out clear and compelling strategies to drive further growth within both Square and CashApp which, we believe, will support a sustained acceleration in top-line growth.
This might be the catalyst needed for a re-rating and to get US investors back interested in the story.
What's been happening with Block shares recently?
The ASX 200 tech stock released its quarterly results for the three months to 30 June on 2 August.
Highlights included an 11.2% year on year boost in quarterly revenue, which came in at $6.16 billion. Block's gross quarterly profit of $2.23 billion was up 19.7% from the prior corresponding period (PCP).
Square drove the big lift in quarterly gross profit, which was $923 million, up 15% year over year, while the CashApp gross profit of $1.30 billion was up 23% year over year.
