Cathy Wood is the founder and CEO of Ark Invest, an asset management firm that invests in innovative companies and disruptive technologies. The firm offers clients a number of exchange-traded funds, including Flagship Arch Innovation ETF, which has returned 39% year to date. But Arch FinTech Innovation ETF That’s up 49% this year, and the firm is leaning toward those gains.
Throughout August, Arch trimmed its holdings Tesla — though it remains the portfolio’s largest position — and has redeployed capital to several fintech companies, including Block it (SQ -2.78%) And ayen (ADYE.Y -2.22%). In terms of property allotment, block currently bearing no. 6 and Aden rank no. 51 holdings out of a total of 125.
Here’s what investors should know about these two growth stocks.
Block divides its business into two product ecosystems: Square for merchants and the Cash app for consumers. The Square ecosystem facilitates commerce by integrating hardware, software and financial services into a unified platform. That end-to-end strategy eliminates complex integration, and it initially helped Block gain momentum with micro merchants, though the company is now pushing upmarket.
Meanwhile, the Cash app ecosystem simplifies consumer finance by allowing users to borrow, send, spend and invest money from a single interface, and it offers this functionality at a much lower cost than traditional banks. so what Cash App can serve users that would not be profitable for many financial institutions, and each new user increases the network effect created by its peer-to-peer capabilities. That flywheel has undoubtedly contributed to rapid adoption. The Cash app was the most downloaded digital wallet among US consumers in 2022.
The block delivered good financial results in the second quarter. Total net profit rose 27% to $1.9 billion, reflecting 18% growth in Square and 37% growth in Cash App, and non-GAAP income rose 117% to $0.39 per diluted share. Management expects gross profit growth to decline by a few percentage points in the current quarter, but the investment thesis remains stable.
Block values its addressable market at $190 billion in gross profit, including $120 billion from Square and $70 billion from Cash App, and the company is taking the right steps to gain share in both ecosystems. For example, Block has built a strong arsenal of business software and banking services over the years beyond payment processing. Those products are bringing larger sellers to Square, while also improving overall retention rates.
Similarly, Block recently made Cash App Pay available to Stripe and Aden merchants, which serves a dual purpose: it gives Block another means of monetizing payments beyond Square, and it expands the Cash App value proposition for consumers (which drives adoption) merchant acceptance. by increasing
On that note, Block’s shares currently trade at 5.2 times forward earnings, a perfect bargain for the five-year average of 18.9. Investors should feel comfortable buying some shares of this fintech stock today.
Blockchain undoubtedly facilitates commerce, but payment processors are not the only piece of the puzzle. To accept electronic payments, merchants also need an acquirer. When the customer uses the card at checkout, the processor sends an authorization request to the issuing bank through the appropriate card network, and the recipient settles the transaction by moving funds from the issuer to the merchant.
European payments company Adyen integrates processing and acquisition capabilities on a single platform that supports electronic payments across physical and digital channels in 100 countries. That strategy gives Adian access to more robust data than stand-alone processors or acquirers, and it uses that data to increase authorization rates and prevent merchant fraud. That attractive proposition has helped the company land such big clients McDonald’s, NetflixAnd Spotify.
Adyen is also an attractive partner for marketplaces Etsy And Uber That’s because its platform includes embedded financial services that allow businesses to create bank accounts, issue cards and send payouts to their own customers. Suffice it to say that Aiden sets itself apart by providing a wide range of capabilities. Indeed, management says it is “the only company that can offer a global integrated payments stack across channels through a single platform.”
Aden performed moderately financially in the first half of the year. Revenue rose 21% to 739 million euros, well below analysts’ forecasts of 40% growth, and net income was flat at 282 million euros due to significant headcount expansion. But investors reacted strongly, with the stock falling 40% after the report.
That seems like an overreaction, especially when management reiterated its expectation of revenue growth in the “mid-twenties and low-thirties” in a recent shareholder letter. That growth trajectory makes its current valuation of 4.3 times sales look pretty cheap. In fact, shares have never been cheaper in the past three years. Investors should consider buying short positions in this growth stock now.
Trevor Jenevin has positions at Block, Etsy, and Tesla. The Motley Fool has positions and recommends Adyen, Block, Etsy, Netflix, Spotify Technology, Tesla and Uber Technologies. Motley Fool has a disclosure policy.