The S&P/ASX 200 Index (ASX: XJO) stock Block Inc CDI (ASX: SQ2) could grow significantly in the coming years, according to some of the major investors that are backing it.
Block offers a number of financial services and products, including Square, which assists businesses in processing transactions and helping them grow.
The company also has a large buy now, pay later presence because it bought Afterpay a few years ago.
The world is steadily becoming more digital, which benefits Square, and two fund managers think that it's an opportunity.
The ASX 200 stock's $200 billion opportunity
The fund manager Medallion owns Block shares in its Australian shares growth fund and noted that between its two segments – the cash app and Square – the company estimates there is a $200 billion gross profit opportunity.
Currently, Block has a market penetration of less than 5% across its addressable markets, meaning there is plenty of room to grow, according to Medallion. The cash app has grown its 'inflows' from US$28 billion in 2018 to US$248 billion, while Square has seen gross payment volume increase from US$48.3 billion in 2022 to US$58 billion in 2024.
The fund manager said that the earnings growth that comes with the growth in users is "exponential" because of Block's high level of operating leverage. Medallion also likes the diversity of the cash app's revenue streams across buy now, pay later, bitcoin, financial services, and deposits.
Medallion believes Block's revenue is quite defensive and that the various offerings create an integrated platform that provides further opportunities for "monetisation and user engagement". It was noted that the ASX 200 stock's exposure to bitcoin helped contribute to the rise of 27% of the Block share price since the end of October 2024.
Medallion concluded its optimistic thoughts on the company with the following:
The nature of the product creates recurring revenue streams which are sticky due to high switching costs and the quality of Square compared to competitors.
Both Cash App and Square capitalise off long-term trends such as digitisation and decentralisation of financial services. Further global expansion and capitalisation of the US market positions Block well to grow its earnings well into the future.
Profitable growth expected
The investment team from Wilson Asset Management (WAM) are also bullish about the company.
WAM recently noted that in the three months to September 2024, Block's gross profit increased 19% year over year to US$2.25 billion, and adjusted operating profit (EBITDA) jumped 69% year over year to US$807 million, which WAM said beat market expectations.
The fund manager expects the ASX 200 stock to outperform its gross profit guidance for 2024 and believes it has a "strong outlook" for 2025.
Overall, there seems to be a lot to be optimistic about with the company.
Block share price snapshot
Despite today's 5% decline, the Block share price is still up more than 20% this year.
