We recently published a list of the 8 Best Long Term Tech Stocks To Invest In Now. In this article, we are going to take a look at where Block, Inc. (NYSE:SQ) stands against the other best long term tech stocks to invest in.
The technology sector came to the market’s rescue in 2023 after the disastrous macroeconomic conditions of 2022. Investments in advanced technologies like generative AI continue to show strong potential for future business growth.
According to CNBC’s Q3 CFO Council survey, 48% of the CFOs said that the tech industry’s growth will outperform all other sectors over the next six months. Moreover, in a September 23 interview with CNBC, Investment Management Partner at Callan Family Office, RaeAnn Mitrione highlighted that the tech sector has been a major beneficiary of the recent Fed rate cut. Lower interest rates are favorable for tech companies, which often thrive in such environments.
The ongoing AI theme has also been a key driver of tech’s strong performance. Additionally, she mentioned that mega-cap tech stocks were previously seen as a safe haven during economic uncertainty, but as the rate environment shifts, the focus may broaden to include smaller, more economically sensitive sectors. Nonetheless, tech’s strong momentum, fueled by AI, is likely to persist for some time.
Optimism in Global Tech Spending for 2024
According to Deloitte’s 2024 technology industry outlook, global tech spending slowed due to high interest rates, economic concerns, and geopolitical issues in 2023. However, optimism is growing for 2024, with projected global IT spending growth of 5.7% to 8%. Some of the growth areas include software, IT services, and AI investments, with AI spending potentially reaching $200 billion by 2025. Cloud computing and cybersecurity are also expected to see strong demand.
The report states that Gen AI is gaining traction but it is expected to grow modestly in 2024, yet more strongly in 2025, with its integration into software and business processes driving productivity and efficiency. AI hardware demand is set to exceed $50 billion next year, while companies continue exploring AI monetization strategies.
Harnessing AI for Greater Energy Efficiency
Additionally, the growing influence of big tech companies and the increasing reliance on AI have led to a significant rise in energy demand. We discussed this in our article about the 13 Best Big Tech Stocks To Buy Now. Here is an excerpt from the article:
“A recent notable trend that people have begun to see because of the rise of big tech companies and the growing use of AI is a greater demand for power. Many major tech companies are beginning to require more energy, with the AWS-owner going as far as buying a nuclear-powered data center for $650 million recently.
The primary driving force for this rising demand is the need to develop AI. Many energy-conscious investors may see this new trend as a red flag for big tech. However, Jensen Huang has noted that while AI takes a ton of energy to train, once developed and trained, it will also help save energy. He particularly noted that AI is going to become so advanced through this development that it will eventually end up offering solutions that can change the way we use energy, making our operations endlessly more energy efficient.”
While concerns about the electricity needed to power AI are justified, according to industry pioneers like Nvidia CEO Jensen Huang, the technology itself will help solve that problem.
Our Methodology
For this article, we used the Finviz stock screener to identify 27 tech stocks with market caps of above $10 billion, Buy or Buy-equivalent ratings from analysts, and over 20% average price target upside. We narrowed our list to 8 stocks with the highest average analyst price target upside as of September 26. The best long term tech stocks are listed in ascending order of their average analyst price target upside.
We also mentioned the hedge fund sentiment around each stock which was taken from Insider Monkey’s database of over 900 elite hedge funds.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Is Block, Inc. (NYSE:SQ) the Best Long Term Tech Stock To Invest In Now?
Block, Inc. (NYSE:SQ)
Average Analyst Price Target Upside: 35.30%
Number of Hedge Fund Holders: 59
Block, Inc. (NYSE:SQ) is an innovative company that creates ecosystems focused on commerce and financial services, both in the United States and around the globe. Previously known as Square, Inc., the company rebranded in December 2021 to reflect its expanding vision. It is among our best long term tech stocks to invest in now.
It offers a wide range of products, including the well-known Square payment processing platform, Cash App for peer-to-peer transactions, and TIDAL, a music streaming service. The portfolio positions the company as a significant player in the fintech sector, harnessing technology to streamline financial transactions and empower small businesses.
At a stake value of $2.68 billion, 59 hedge funds tracked by Insider Monkey held positions in Block (NYSE:SQ) in the second quarter. As of Q2, ARK Investment Management is the top shareholder in the company and has a position worth $534.783 million.
In recent times, the company has shifted its emphasis from merely growing revenue to enhancing profitability. The goal is to achieve the “Rule of 40” by 2026, a benchmark used to evaluate the health of software-as-a-service (SaaS) companies. The rule states that the combination of revenue growth and profit margin should total at least 40%.
In the second quarter, the company reported a net income of $195.3 million, or $0.31 per share, which is a substantial 91% increase from the previous year. The Cash App division continues to be a significant contributor to profitability, achieving $1.3 billion in gross profit, which represents a 23% year-over-year increase.
Moreover, the monthly active users of the Cash App Card rose by 13% to over 24 million in June, which is a sign of strong engagement and growing adoption of the platform.
During Q2, Block (NYSE:SQ) achieved gross profit growth of 20% alongside adjusted operating margins of 18%. Projections for the full year suggest a potential operating margin of 35%, an increase from earlier estimates of 32%. The improvement is supported by expectations of more than 18% gross profit growth and operating margins of at least 16%.
For the twelve months ending in June, the company reported adjusted free cash flow of $1.43 billion, 2x compared to the prior period, which represented 57% of adjusted EBITDA. Lastly, the stock has a consensus Buy rating from 44 analysts. The average price target of $90.00 has a 35.30% upside to the current price, as of September 26.
Columbia Contrarian Core Fund stated the following regarding Block, Inc. (NYSE:SQ) in its Q2 2024 investor letter:
“Block, Inc. (NYSE:SQ) – It is hard to pinpoint why the stock moved lower in the last two months of the quarter, but the most likely reason seems to be simply that investor sentiment on the stock remains generally quite negative for the near term. Investors seem to be taking recent comments from Jack Dorsey (CEO of Square, who also heads Square’s parent company, Block) to mean that a lot still needs to be fixed, rather than the perspective that Mr. Dorsey is being honest and straightforward that things weren’t working and that Square now has a clear plan and a lot of urgency behind its initiatives. The reinvigoration of Square appears very real, with a bold vision to become a generational technology company. The organization is aligned on making Square and Cash App a vertically integrated commerce platform for both sellers and consumers. For Square, this means achieving a growth rate similar to its early days with much better technology while, for Cash App, success is defined as becoming the leading primary bank for those making less than $150,000 per year, along with significant success combining the two ecosystems. The experimentation and innovation culture is back with buy-in across the organization, with a key focus on engineering discipline and exceptional products. This discipline had been lost and is now coming back and should create much better product experiences that are customer-problem focused and enable the company to regain its prior pace of market share gains.”
Overall, SQ ranks 7th on our list of the best long term tech stocks to invest in. While we acknowledge the potential of SQ as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than SQ but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.