A Seat at the Table
The S&P 500 is the popular benchmark index that tracks 500 leading U.S. companies, but it is not static and undergoes periodic rebalancing to maintain its representation of the economy.
Managed by S&P Dow Jones Indices, inclusion requires a company to be a U.S.-based firm with a market cap of at least $14.5 billion, high liquidity, a public float of at least 10%, and positive earnings in the most recent quarter plus the prior four quarters combined.
When a constituent is acquired or fails to meet the criteria, the committee selects a replacement. Recently, Chevron’s (NYSE:CVX | CVX Price Prediction) $53 billion acquisition of Hess created a vacancy. Fintech leader Block (NYSE:XYZ) was chosen to fill this slot, effective July 23.
After reporting first-quarter earnings on May 1, Block’s stock plummeted 20% the next day due to softer guidance. However, it rebounded sharply, surging 76% over the next two months. Since the S&P announcement two weeks ago, the stock is up only 7%. With such a rapid rise, is Block a buy at $78, or should investors wait for a better entry point?
A Business That Goes Beyond Fintech
Block, formerly Square, operates two core ecosystems: Square, a payment platform for merchants, and Cash App, a peer-to-peer payment and financial services app for consumers.
Square provides point-of-sale systems and tools for small businesses, while Cash App offers banking, investing, and Bitcoin trading. Block also owns Afterpay, a buy-now-pay-later service, and has ventures in Bitcoin infrastructure like Bitkey and Proto.
In Q1, Block reported $5.77 billion in revenue, a 3% year-over-year decline, with adjusted operating income rising 28% due to margin expansion. Its focus on data-driven lending and niche marketing, such as targeting teens for Cash App, fuels growth.
Additionally, Block’s Bitcoin initiatives, including holding the cryptocurrency on its balance sheet, position it to capitalize on digital currency trends.
Why the Market’s Mood Swung
The 20% post-earnings selloff on May 2 stemmed from Block’s cautious Q2 guidance, citing increased marketing costs and macroeconomic uncertainty, including tariff concerns. Investors feared slower growth in a competitive fintech landscape.
However, the market’s pessimism was short-lived. Block’s strategic moves, like the nationwide rollout of Cash App Borrow and new Square features, reassured investors of its growth potential. The stock’s 76% surge since May reflects confidence in Block’s ability to reaccelerate revenue through innovation and cost discipline.
The S&P 500 inclusion announcement on July 18 added a 7% boost, driven by mechanical buying from index-tracking exchange-traded funds. Despite a 14% year-to-date decline before the rally, Block’s $48 billion market cap and fintech dominance made it a compelling replacement for Hess.
Long-Term Growth Prospects
Block’s long-term outlook is promising but not without risks. Its focus on scaling Cash App Borrow using machine learning (ML) to reduce defaults and increase loan limits could drive double-digit revenue growth.
Upstart Holdings (NASDAQ:UPST) is also using artificial intelligence and machine learning to assess credit risk for its banking partners. Its stock is up 302% since its December 2020 IPO and has tripled over the past year.
Square’s ongoing feature enhancements aim to boost merchant retention, while Bitcoin-related ventures offer exposure to a high-growth asset class. Analysts project 7% to 10% S&P 500 earnings growth in 2025, with Block’s fintech and crypto exposure potentially outpacing the broader market.
However, tariff uncertainties and rising input costs could pressure margins, as seen in Q1 forecasts of 11.6% net profit margins for the S&P 500 (they subsequently came in at 12.7%). Competition in fintech and regulatory risks around cryptocurrencies also loom. Still, Block’s diversified revenue streams and innovation focus position it well for sustained growth.
Key Takeaways
At $78 per share, Block trades at roughly 30 times forward adjusted earnings, a reasonable valuation for a fintech with double-digit growth potential. Its recent 76% surge reflects market enthusiasm, but the modest 7% gain post-S&P inclusion suggests the initial hype has cooled.
While tariff and competitive risks persist, Block’s diversified business, margin expansion, and Bitcoin ventures make it a compelling long-term investment. Investors might find a better entry point during a broader market pullback, but at $78, Block remains a buy for those seeking growth in fintech and crypto.
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