Fintech stocks haven’t been spared in the 2022 growth stock slide. In fact, these once high-flying names are among the epicenters of growth equity erosion.
Just look at Block (NYSE:SQ). The purveyor of Cash App is off 61.30% year-to-date, as of November 8, but the company’s third quarter earnings report, which was released last week, gave investors reason for optimism. That much is confirmed by the fact that the shares are up almost 6% over the past week and 10.40% over the past month.
The possibility of a longer-ranging Block rebound is relevant to an assortment of exchange traded funds, including the VanEck Digital Transformation ETF (DAPP ). Block exposure could be a positive for DAPP if growth stocks return to favor in 2023. Some sell-side analysts are bullish on Jack Dorsey’s company.
“Management highlighted its focus on enabling developers around integrations for third-party platforms to deliver greater insights to large sellers,” wrote Macquarie analyst Paul Golding in a recent report to clients. “This to us speaks to the company’s focus on being valuable to large enterprises – something we have heard for quite some time.”
Golding upgraded Block to “outperform” from “neutral” with a price target of $100. That’s less than half the 52-week high of $241.30, but it does imply upside of 60% from the November 8 close.
That’s a relevant outlook for DAPP investors. The VanEck ETF, which debuted in April 2021, follows the MVIS Global Digital Assets Equity Index and allocated 8.39% of its weight to Block as of October 31. That made the fintech stock DAPP’s third-largest component on that date.
Some of the pressure on Block’s shares has come by way of the company’s acquisition of buy-now-pay-later (BNPL) firm Afterpay, which occurred when growth stocks were soaring. Now, some market participants are fretting about the ability of cash-strapped consumers to service BNPL obligations that were established when the economy was healthier than it is today.
However, Macquarie’s Golding says that Afterpay serves a purpose for Block and could be a winning strategy over the long haul.
“We now see BNPL more as a customer acquisition tool rather than a standalone profit generating industry. Though this may still be in the scope of the original intentions of Block’s acquisition of Afterpay…, we think the return profile may not be as attractive as previously considered,” according to the analyst.
Block is one of 25 holdings in DAPP, and the ETF’s top 10 components command about two thirds of its weight.
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