Motley Fool: Block, aka Square, is a financial technology powerhouse
Block, formerly known as Square, is home to the Square platform, Cash App, Spiral, Tidal and TBD. The company dramatically underperformed the market in 2022; reasons included recession-constrained consumer spending and fears surrounding its (expensive) Afterpay acquisition.
However, this is still an impressive financial technology disruptor with lots of room to grow its ecosystem. Through Square, Block offers everything from point-of-sale systems and payment processing services to marketing software and deposit accounts. It’s been growing Square internationally and adding larger customers, while processing more than $200 billion in annualized volume.
Meanwhile, over 49 million people actively use Cash App. Whereas Square simplifies commerce for sellers, Cash App aims to simplify money management for consumers. It brings together ways to send, spend, borrow and invest money on a single platform, a convenience that’s especially appealing to younger generations. Cash App ranked as the most-downloaded finance app in the U.S. in 2022, with more downloads than PayPal and Venmo combined.
As more features are added to these platforms, they’ll become even stickier over time. With an estimated $185 trillion in payment volume worldwide, the company could be just getting started. (The Motley Fool owns shares of and has recommended Block.)
Ask the Fool
From M.T., New Orleans: Is it best to invest in companies with lots of cash and no debt?
The Fool responds: Not necessarily. Lots of cash is generally good for a company, as it can (for example) permit it to invest in growth or pay dividends to shareholders. Companies with ample cash can take advantage of opportunities that come along. But having much more cash than can be put to good use is not optimal — so some companies aim to have low cash balances, planning to borrow funds when needed. (This strategy is less attractive when interest rates are high, though.)
Meanwhile, it’s generally OK for a company to have a manageable amount of debt — especially at low interest rates. If it’s borrowing at a relatively low rate while getting great results from the money, that’s an effective strategy.
From S.C., Elkhart, Ind.: What’s a “high-yield” stock?
The Fool responds: There’s no official definition, but it’s generally one with a dividend yield topping (or significantly topping) some benchmark, such as the 10-year U.S. Treasury note — which recently yielded 3.7%.
A stock’s dividend yield is the current annual dividend amount divided by the stock’s current price. So if the Home Surgery Kits Co. (ticker: OUCHH) is trading at $100 per share while paying $1 per share in dividends each quarter (for a total of $4 per year), its dividend yield would be $4 divided by $100, resulting in 0.04, or 4%.
Don’t invest in any high-yield stock without researching it first. As a stock price falls, its yield rises, and vice versa — so one ultra-high yield might reflect a company in trouble, while another might reflect a healthy company with lots of cash to spare.
The Fool’s School
Exchange-traded funds — which are like mutual funds in many ways, but which trade like stocks — can be great investments for most of us. Many are index funds, often with very low fees. There’s a kind of ETF that most investors should avoid, though: leveraged ETFs.
A leveraged ETF often tracks a certain market index or industry, as a traditional index fund might — but with a twist. It employs leverage (a fancy word for debt) in order to amplify gains. It may also use options, futures or other derivatives. A typical leveraged ETF might aim to deliver double or triple the return of an index it tracks — and its name might reflect that via the inclusion of a “2x” or “3x” in its name. (Some just use terms such as “ultra” in their names.) For example, if the Dow Jones Industrial Average rises by 2% one day, the UltraPro Dow30 ETF will appreciate by 6% (less fees).
There are even “inverse” leveraged ETFs: A 2x inverse leveraged S&P 500 ETF, for example, will aim to give investors twice the opposite return of the S&P 500. So if the S&P 500 drops 1% on a certain day, the ETF would go up by 2% (less fees).
This may sound good, but there are several major cautions. Remember that while a leveraged ETF can amplify gains, perhaps doubling or tripling them, it will also amplify losses. So a 3x leveraged ETF can deliver a 10% blow if the index it tracks falls by 3.3%.
Even worse, as these ETFs are focused on daily returns, they’re not meant to be long-term investments. Indeed, holding them for days, weeks or months can deliver big losses — and they can even fall in value when expected to rise. This is problematic, as it goes against the rather effective investing strategy of buying shares of terrific businesses (or simply buying into low-fee, broad-market index funds) and hanging on for many years, if not decades.
Unless you have an appetite for risk, steer clear of these ETFs.
My Dumbest Investment
From E., online: My worst investment? When General Motors shares fell below $10 apiece, I went all in. I did the same with Washington Mutual. What a schmuck I was.
The Fool responds: Don’t be so hard on yourself. You made an easy-to-understand mistake. After all, if a stock’s price falls, it will seem to be more of a bargain. Before buying more shares, though, look into why it has fallen. If it’s due to external or temporary factors, such as an overall market meltdown or supply chain issues that should soon be resolved, buying more can be effective: You’d be “averaging down,” shrinking your cost basis, or average price paid.
But in many cases, the company is struggling with major or lasting problems — so buying more shares is, as the old investing saying goes, “like trying to catch a falling knife.” It can be hard to imagine that a stock that has plunged, say, 60% can plunge much further, but it can. And if the company’s problems are severe, it can end up filing for bankruptcy protection, which can leave shareholders with nothing.
Washington Mutual and General Motors did end up filing for bankruptcy in 2008 and 2009, respectively, with shareholders like you getting little to nothing for their pre-bankruptcy shares. General Motors emerged anew in 2010, but Washington Mutual’s assets were sold to JPMorgan Chase.
Who Am I?
I trace my roots back to 1593, when one of my brands — Chateau d’Yquem — got its start as a French wine estate. Le Bon Marche Rive Gauche, another of my properties, began as one of the world’s first department stores in 1852. Today, with a recent market value topping $430 billion, I’m France’s largest company by market cap (and recently Europe’s largest, too). I’m the product of a big 1987 merger and a luxury specialist; my brands include Dom Perignon, Veuve Clicquot, Hennessy, Glenmorangie, Christian Dior, Kenzo, Givenchy, Fendi, Bulgari, Tiffany & Co., TAG Heuer and Sephora.
Can’t remember last week’s trivia question? Find it here.
Last week’s trivia answer: Valero Energy