After a turbulent year for investors, the S&P 500 has staged an impressive comeback, surging 20% since the beginning of the year, marking a potential entrance into a new bull market. This renewed optimism has sparked interest among astute investors seeking opportunities to bolster their portfolios for long-term gains. As the market evolves, two stocks have captured the attention of the smartest investors, offering compelling growth prospects and strong financials.
1. Block: Weathering Macroeconomic Headwinds
Block (SQ -2.12%), a leading player in the digital payments arena, has continued to defy macroeconomic headwinds, delivering remarkable growth even in challenging times. During the first three months of 2023, the company’s gross profit surged by an impressive 32%, amounting to a staggering $1.7 billion. Both Square for merchants and Cash App for consumers have witnessed robust gains, positioning Block to capitalize on the booming digital transactions landscape.
One of the driving forces behind Block’s success is its Square segment, which has successfully onboarded larger merchants. In the most recent quarter, the segment processed an annualized gross payment volume of $184 billion. By offering a comprehensive suite of mission-critical services, such as invoicing, working capital loans, and employee payroll, Block has established a formidable economic moat, strengthened by the power of switching costs, effectively locking in its merchant base.
Notably, Cash App, the number one finance application on the Apple app store, boasts an impressive 53 million monthly active users. During the first quarter, the platform witnessed $61 billion of inflows, showcasing its potential to replace traditional bank accounts for many users. Its user-friendly interface allows seamless stock trading, direct deposits, money transfers, and debit card usage.
Despite Block’s shares climbing 25% in 2023, they remain 72% below their all-time high in August 2021. The stock’s decline was attributed to rising interest rates impacting valuations of high-growth businesses. As a result, Block’s current price-to-sales multiple stands at just 2.5, less than half its historical average of 6.2, making it an attractive opportunity for discerning investors seeking to add this stock to their portfolios.
2. Mastercard: Riding the Wave of Travel Demand
Another stock on the radar of smart investors is Mastercard (MA -1.97%), the global giant in card payments, trailing only behind Visa. In the second quarter, Mastercard recorded impressive revenue and diluted earnings per share figures, both surging by double digits year over year, highlighting the company’s resilience and adaptability in an evolving market.
Mastercard has reaped the benefits of a strong resurgence in travel demand, evident in its cross-border transactions, which skyrocketed by 24% in the latest quarter. Surpassing pre-pandemic levels, these transactions, occurring between merchants’ banks and issuing banks from different countries, contribute significantly to the company’s revenue.
With 3.2 billion cards in circulation and over 100 million merchant acceptance points, Mastercard boasts a robust economic moat fortified by powerful network effects. Consumers worldwide trust and utilize these cards due to their widespread acceptance, while merchants find them indispensable as a preferred method of payment.
Mastercard’s financial prowess is equally impressive, sporting a net income margin of 45% in 2022. Furthermore, the company’s minimal capital investment requirements further bolster its free cash flow generation, enabling share buybacks and dividend payments to shareholders.
Discerning Opportunities in the Bull Market
While both Block and Mastercard present compelling investment cases, each carries unique attributes that appeal to different types of investors. Block’s position in the burgeoning digital transactions landscape and its current undervalued stock price make it an attractive proposition. On the other hand, Mastercard’s robust financials, powerful network effects, and solid presence in the global payments market offer long-term stability for investors.
As the bull market gains momentum, prudent investors are keeping a close eye on these two stocks, seeking to capitalize on their growth potential and strengthen their portfolios for sustained success in the dynamic financial landscape.
