Insights

Why Block Stock Popped Today

What happened

Fintech giant Block (NYSE: SQ) — the company formerly known as “Square” — was trading 2.5% higher as of 11:30 a.m. ET Wednesday after growth investing aficionado Cathie Wood revealed that she spent just under $5 million Tuesday to acquire just over 82,000 shares.  

So what

Cathie Wood’s ARK Innovation ETF (NYSEMKT: ARKK) hasn’t been doing so hot this year: It’s down by 57% since 2022 began. Nevertheless, a lot of growth stock investors still look to Wood for clues about which way the tech winds are blowing, and some imitate her trades, which she publishes on Ark’s website with little delay.

Wood’s funds bought Block stock pretty aggressively throughout most of May (nearly 355,000 shares acquired) — but then abruptly halted purchases after the stock topped $80 a share late in the month. So those who follow her probably took notice when Wood resumed buying Block this week.

Block dropped below $60 a share a week ago, but has since regained a bit of ground. Presumably, these are the numbers Wood is focusing on — calculating that Block stock is a bargain at around $60 a share, and only begins to look expensive at around $80.

Now what

Of course, right now, Block stock is trading between those two numbers, and the question investors will be asking is: How far above $60 does Block stock remain a bargain? (And perhaps: How close to $80 must it get before it’s time to sell?)

Individual investors must decide how to answer these questions for themselves — but as for me, I advise erring on the conservative side. Here’s why: Block’s unprofitable from a GAAP standpoint, but with $965 million in trailing free cash flow, the stock trades for a little over 37 times free cash flow. That seems expensive, given that most analysts polled by S&P Global Market Intelligence don’t see Block growing earnings by even 15% annually over the next five years.

So even after its 75% share price decline over the past 52 weeks, I struggle to see value in Block stock — whether at $80 or even at $60.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Block, Inc. The Motley Fool has a disclosure policy.

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