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When a quality company with excellent long-term prospects is having some short-term issues, it’s a time to buy.

Shaw and Partners portfolio manager James Gerrish, in his Market Matters newsletter, identified exactly such an ASX stock this week.

“We’ve been flagging diversified metals and mining company South32 Ltd (ASX: S32) for a number of weeks, following their weaker-than-expected quarterly production update in April.”

Short-term wobbles, long-term strength

Indeed the South32 share price tumbled 9% in just a few hours on 24 April after it downgraded guidance.

Production fell across the board in the March quarter after unfavourable weather impacted some of its operations.

The stock for the metals miner has fallen almost 8% over the past 12 months.

Gerrish’s team isn’t letting that impact its longer-term view of the mining sector.

“Recession fears are building, which is putting pressure on the miners,” he said.

“We like the stock, and the pieces of the puzzle are starting to come together for us to increase our exposure to resources, a plan we’ve held for months but have remained patient to date.”

Arguably the best feature about South32 shares is the 8% dividend yield, which is fully franked.

Gerrish’s Shaw and Partners colleague Jed Richards agreed with his bullishness.

“The recent share price retreat represents a buying opportunity, as South32 offers an appealing mix of raw material and base metal exposures,” Richards told The Bull.

“China re-opening its economy should boost commodity prices.”

This is when you pounce

Gerrish predicted that the dividend yield would remain solid in the coming period.

“South32 currently trades on an estimated PE of 9.5x for 2023, plus it’s also forecast to yield more than 5% over the next 12 months,” he said.

“In our opinion, S32 gives an excellent diversified resources exposure without the huge exposure to iron ore which comes with both BHP Group Ltd (ASX: BHP) and Rio Tinto Ltd (ASX: RIO).”

The team at Market Matters would buy up South32 shares as soon as it hits a particular sweet spot.

“We are looking to accumulate South32 into any weakness under $4.”

The South32 share price closed Friday at $4.02.

The post Stay alert! Expert urges buying this ASX dividend stock as soon as it dips below $4 appeared first on The Motley Fool Australia.

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More reading

• Analysts name 2 strong ASX 200 dividend shares to buy
• Invested $4,000 in South32 shares 5 years ago? Here’s how much passive income you’ve earned
• South32 share price slumps amid ‘important’ US milestone
• ‘Buying opportunity’: 2 ASX 200 mining shares ripe to snap up now
• Here’s why brokers say these ASX dividend stocks with big yields are buys

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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At the start of each week, I like to look at ASIC’s short position report to find out which shares are being targeted by short sellers.

This is because I believe it is well worth keeping a close eye on short interest levels as high levels can sometimes be a sign that something isn’t quite right with a company.

With that in mind, here are the 10 most shorted shares on the ASX this week according to ASIC:

• Flight Centre Travel Group Ltd (ASX: FLT) continues its long run as the most shorted ASX share after its short interest rose slightly to 11.8%. Short sellers aren’t giving up on this one despite a recent trading update coming in strong. Revenue margin headwinds appear to be the chief concern of short sellers.
• Zip Co Ltd (ASX: ZIP) has short interest of 10.25%, which is down week on week. Profitability and regulatory concerns seem to be behind this.
• Core Lithium Ltd (ASX: CXO) has short interest of 8.8%, which is down week on week. Short sellers will be frustrated to have seen this lithium miner’s shares rocket higher last week after further M&A activity in the industry.
• Jervois Global Ltd (ASX: JRV) has 8.6% of its shares held short, which is down week on week. The suspension of the final construction of the Idaho Cobalt Operations has hit this company’s shares hard.
• Sayona Mining Ltd (ASX: SYA) has seen its short interest ease to 8.5%. Sayona Mining’s shares also rose strongly last week amid further lithium M&A activity.
• Pointsbet Holdings Ltd (ASX: PBH) has 8.45% of its shares held short, which is up slightly week on week. Short sellers appear concerned by this sports betting company’s huge cash burn in a highly competitive industry.
• Lake Resources N.L. (ASX: LKE) has 8% of its shares in the hands of short sellers, which is down since last week. An almost 20% gain last week by this lithium developer’s shares will have been hard for short sellers to take.
• AMA Group Ltd (ASX: AMA) has 7.7% of its shares held short, which is down week on week. This smash repair company’s balance sheet is in a very precarious state.
• Temple & Webster Group Ltd (ASX: TPW) has seen its short interest ease to 7.6%. Traders appear to believe the housing market downturn and a return to offline shopping could mean this online retailer underperforms.
• Megaport Ltd (ASX: MP1) has seen its short interest fall again to 7.4%. Short sellers have been closing positions since this network as a service company released a very positive trading update and guidance.

The post Here are the 10 most shorted ASX shares appeared first on The Motley Fool Australia.

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More reading

• Here are the top 10 ASX 200 shares today
• Here are the 3 most heavily traded ASX 200 shares on Friday
• Here are the top 10 ASX 200 shares today
• Why Allkem, Core Lithium, Graincorp, and Omni Bridgeway shares are racing higher
• Here are the 3 most heavily traded ASX 200 shares on Thursday

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Megaport, PointsBet, Temple & Webster Group, and Zip Co. The Motley Fool Australia has recommended Flight Centre Travel Group, Megaport, PointsBet, and Temple & Webster Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Technology One Ltd (ASX: TNE) share price could be great value ahead of its results release later this month.

That’s the view of analysts at Bell Potter, which have just upgraded the ASX 200 tech share to a buy rating from hold.

According to the note, the broker now has a buy rating and improved price target of $17.00 on the enterprise technology provider’s shares.

So, with the Technology One share price currently fetching $14.88, this implies potential upside of 14% over the next 12 months.

Why is the broker bullish on this ASX 200 tech share?

The note reveals that Bell Potter is expecting Technology One to release a strong result later this month when it provides its half-year update.

Bell Potter expects the following to be reported:

Total revenue up 14% to $196.6m; PBT up 17% to $49.9m; PBT margin up from 24.7% in 1HFY22 to 25.4% in 1HFY23; and interim dividend up 10% to 4.62c (60% franked).

The broker also highlights that the company’s annualised recurring revenue (ARR) will be a key focus. Pleasingly, it is expecting very strong growth in this key metric. It adds:

Key focus for us, however, will be on total ARR which we forecast to grow by 21% to $350m at the end of H1 and such a result will make the $500m+ target by the end of FY26 look very achievable if not conservative.

Why should you invest?

Bell Potter believes this positive medium term outlook makes this an ASX 200 tech share to buy now. Particularly given its belief that management will be forced to upgrade its guidance in due course. It explains:

We also continue to forecast total ARR of $385m, $452m and $535m at the end of FY23, FY24 and FY25. That is, we already forecast Technology One will achieve its $500m+ total ARR target in FY25 and hence why we expect the company to bring forward this target by a year at some stage this calendar year.

The post Why Bell Potter just upgraded this ASX 200 tech share appeared first on The Motley Fool Australia.

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More reading

• TechnologyOne share price rises on cyber incident update
• ASX 200 stock Technology One halted following cyber attack

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Technology One. The Motley Fool Australia has recommended Technology One. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Let us prepare for another eventful week for ASX shares with the three most critical things to monitor, according to eToro market analyst Josh Gilbert:

1. Xero full-year report

Thursday sees New Zealand accounting software provider Xero Limited (ASX: XRO) release its full-year results.

Gilbert noted Xero shares have phenomenally gained more than 30% so far in 2023.

“Despite this positive start to the year, Xero’s share price remains below its peak of $155 during the 2020-2021 tech boom,” he said.

“The upcoming full-year results announcement holds significant importance for investors, as they hope it will help reignite the shares and push them towards previous highs.”

A new chief executive, Sukhinder Singh Cassidy, started at Xero in February.

“She has outlined a strategy to reduce operating costs and drive profitability, which will be the focal point of the upcoming full-year results, particularly after earnings missed expectations in its half-year results and its net loss widened,” said Gilbert.

“The market believes that the new CEO’s focus on profitability will pay off, expecting to report a net profit of $3 million for the full year — with revenues climbing by 28%.”

2. RBA minutes

After taking a rest in April, the Reserve Bank resumed its interest rate hiking cycle this month. 

The release of the board minutes this week will provide an insight into its thought process.

The worry for ASX shares is whether the central bank will continue with its hawkish attitude.

“If the board continues to signal the possibility of ‘further tightening to monetary policy’, it may lead to market weakness since the market is now pricing in rate cuts by October,” said Gilbert.

“However, any shift in language to hint that the end of the rate hikes could be in sight will be well received by the market.”

The Reserve Bank has an unenviable job trying to maintain a delicate balance.

“The RBA will walk a fine line between outlining that previous tightenings will begin to have their effect whilst still signalling that inflation is still too high,” Gilbert said.

“If the RBA gives an inch, the market will take a mile.”

3. Chinese giants due to report financials

Gilbert reckons investors will be looking to the latest numbers from a couple of tech giants in the second-largest economy in the world and Australia’s largest trading partner.

Tencent Holdings Ltd and Alibaba Group Holding will hand down quarterly earnings on Wednesday and Friday, respectively.

“Expectations are low… Alibaba’s sales growth is set to come in under 3%, and Tencent will still report single-digit growth, a stark contrast from the years of 20%+ revenue growth,” said Gilbert.

But the recent reporting season in the United States showed that low expectations could trigger upside stock price surprises.

“Despite plenty of optimism from the re-opening in China, consumers are still reluctant to spend with worries over an uncertain economic outlook, and that hasn’t lived up to expectations that stocks priced in at the start of the year.”

The post 3 things ASX investors should watch this week appeared first on The Motley Fool Australia.

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More reading

• 3 compelling reasons to buy Xero shares right now
• ‘High growth rate’: 2 ASX tech shares you need to look at right now
• 2 exciting ASX growth shares I’d buy and hold to 2030
• Morgans names more of the best ASX 200 stocks to buy in May
• Top brokers name 3 ASX shares to buy next week

Motley Fool contributor Tony Yoo has positions in Xero. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Xero. The Motley Fool Australia has positions in and has recommended Xero. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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There are a lot of ASX 200 dividend shares to choose from, but two that could be strong picks right now are listed below.

Here’s why analysts believe these could be the dividend shares to buy now:

South32 Ltd (ASX: S32)

The first ASX 200 dividend share that could be a buy is diversified miner South32.

Goldman Sachs is a fan of the company for a number of reasons. These are its attractive valuation, improving free cash flow outlook due to higher production and commodity prices, and potential upside from base metal growth projects.

Its analysts are expecting this to underpin fully franked dividends of 12 US cents per share in FY 2023 and then 28 US cents per share in FY 2024. Based on the current South32 share price of $4.02 and the latest exchange rates, this will mean yields of 4.5% and 10%, respectively.

Goldman Sachs also sees decent upside for its shares with its buy rating and $4.80 price target.

Transurban Group (ASX: TCL)

Another strong ASX 200 dividend share to consider buying is Transurban.

It is one of the world’s leading toll road operators with a collection of important roads across several locations.

After struggling through the pandemic, Transurban has bounced back strongly and its roads are thriving again. In fact, it recently revealed record volumes during the first half of FY 2023. This bodes well for the future, as does its development pipeline and inflation-linked price increases.

UBS is a fan of the company and has a buy rating and $15.45 price target on its shares.

As for dividends, the broker is forecasting dividends per share of 57 cents in FY 2023 and then 61 cents in FY 2024. Based on the current Transurban share price of $14.84, this will mean yields of 3.8% and 4.1%, respectively.

The post Analysts name 2 strong ASX 200 dividend shares to buy appeared first on The Motley Fool Australia.

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More reading

• 5 ASX shares I’d buy for a US recession
• Invested $4,000 in South32 shares 5 years ago? Here’s how much passive income you’ve earned
• Top defensive ASX shares to buy in May 2023
• South32 share price slumps amid ‘important’ US milestone
• ‘Buying opportunity’: 2 ASX 200 mining shares ripe to snap up now

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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On Friday, the S&P/ASX 200 Index (ASX: XJO) finished the week on a mildly positive note. The benchmark index rose a fraction to 7,256.7 points.

Will the market be able to build on this on Monday? Here are five things to watch:

ASX 200 expected to edge higher

The Australian share market is expected to edge higher this morning despite a poor finish to last week on Wall Street. According to the latest SPI futures, the ASX 200 is expected to open the day 7 points higher this morning. In the United States, the Dow Jones was down a fraction, the S&P 500 dropped 0.15%, and NASDAQ fell 0.35%.

ANZ shares go ex-dividend

The ANZ Group Holdings Ltd (ASX: ANZ) share price is likely to trade lower on Monday. That’s because this banking giant’s shares are trading ex-dividend this morning for its upcoming payout. Eligible shareholders can now look forward to receiving the bank’s fully franked 81 cents per share interim dividend in their nominated accounts on 3 July.

Oil prices fall

It could be a subdued start to the week for ASX 200 energy shares such as Beach Energy Ltd (ASX: BPT) and Santos Ltd (ASX: STO) after oil prices fell on Friday. According to Bloomberg, the WTI crude oil price was down 1.2% to US$70.04 a barrel and the Brent crude oil price dropped 1.1% to US$74.17 a barrel. Demand fears put pressure on oil prices.

Gold price edges lower

ASX 200 gold shares including Evolution Mining Ltd (ASX: EVN) and Northern Star Resources Ltd (ASX: NST) could have a soft start to the week after the gold price dropped on Friday night. According to CNBC, the spot gold price dropped 0.25% to $2,015.6 per ounce. A strong US dollar weighed on the precious metal.

QBE rated as a buy

The team at Morgans remains positive on QBE Insurance Group Ltd (ASX: QBE) shares following last week’s quarterly update. Although the broker described the quarter as a “blip”, its analysts “still see the fundamental story of QBE’s earnings improving strongly over the next few years as intact.” Morgans has an add rating and $16.50 price target on QBE’s shares.

The post 5 things to watch on the ASX 200 on Monday appeared first on The Motley Fool Australia.

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More reading

• These are the best ASX 200 bank shares to buy now: analysts
• Green skies ahead: These 2 ASX 200 stocks upgraded their earnings guidance this week
• Bank of Queensland is offering the highest savings interest rate of any ASX bank. What might this mean for shareholders?
• Here are the top 10 ASX 200 shares today
• Here are the 3 most heavily traded ASX 200 shares on Friday

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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If you’re a value investor then cheap ASX shares will no doubt be of interest to you.

The good news is that there are two ASX shares that have just been declared as cheap by analysts.

They are as follows:

Rural Funds Group (ASX: RFF)

Analysts at Bell Potter believe that agricultural property company Rural Funds could be a dirt cheap ASX share following recent weakness. In fact, the broker highlights that the current discount to net asset value (NAV) implies that something disastrous is going to happen in agricultural property. However, the broker appears to doubt that this will be the case. It said:

RFF is down ~39% from its Jan’22 peak a material underperformance relative to the XPJ, which is down ~21% over the same time frame. The underperformance has come despite double digit YOY gains in agricultural land values in CY22. In effect the current 31% discount to market NAV is implying a downward correction in property values comparable to that seen in US agricultural land values in 1932-33 and 1985-87.

Bell Potter has a buy rating and $2.65 price target. It also expects dividend yields in the region of 6% for the foreseeable future.

Super Retail Group Ltd (ASX: SUL)

Another cheap ASX share to consider buying is Super Retail. It is the retail conglomerate behind brands such as Macpac, Rebel, and Super Cheap Auto.

Citi rates the retailer highly and put a buy rating and $14.50 price target on its shares earlier this month. This was in response to a solid quarterly update, which the broker believes demonstrates the company’s resilience. It commented:

Super Retail’s trading update again demonstrated resilience in sales across the board. The implied 4yr CAGR for the most recent 10-week period showed only very slight moderation from the strong February trading update across all brands. On the negative side, GP margins look to be down ~80bps in 2H23 to date on the pcp, better than the market’s expectation of -100bps though worse than we expected. High promotional intensity in BCF’s categories has continued from 1H23. We reduce our FY23e EBIT by ~1% but remain 8% above consensus for 2H. Super Retail remains our top pick in consumer discretionary.

All in all, with its shares changing hands for under 11x forward earnings and offering a dividend yield greater than 5%, Citi appears to see Super Retail as an ASX share to buy.

The post These cheap ASX shares are bargain buys: brokers appeared first on The Motley Fool Australia.

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More reading

• 5 ASX shares I’d buy for a US recession
• Turning ASX shares into a $40,000 annual passive income generator
• UBS tips 4 ASX 200 retail shares to benefit from the federal budget
• Top brokers name 3 ASX shares to buy today
• Top defensive ASX shares to buy in May 2023

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Super Retail Group. The Motley Fool Australia has positions in and has recommended Rural Funds Group and Super Retail Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Are you searching for ASX dividend shares to buy? If you are, then the two named below could be worth checking out.

Both have been named as buys by analysts and tipped to provide attractive yields. Here’s what you need to know about them:

Charter Hall Long WALE REIT (ASX: CLW)

The Charter Hall Long Wale REIT could be an ASX dividend share to buy when the market reopens.

When you own property, your biggest concern is having tenants in there paying rent. The good news is that this is not a problem for this REIT. Far from it! At the last count, the company had almost 100% occupancy with a weighted average lease expiry (WALE) of 12 years.

This provides great visibility on its future earnings and arguably makes it a low risk option in the property space. Particularly given how the majority of its tenants are either from The corporate and government sectors.

It is largely for this reason that Citi currently has a buy rating and $5.00 price target on its shares. The broker highlights its “low risk income stream with c. 12 year WALE and 99.9% occupancy.”

Citi also expects some big dividend yields. It is forecasting dividends per share of 28 cents in FY 2023 and then 29 cents in FY 2024. Based on the current Charter Hall Long Wale REIT share price of $4.38, this will mean yields of 6.6% and 6.85%, respectively.

Dicker Data Ltd (ASX: DDR)

Dicker Data could be another ASX dividend share to buy next week. It is one of the largest technology hardware, software, and cloud distributors in Australia and New Zealand.

Last week, Dicker Data released its first-quarter update and revealed solid revenue and earnings growth over the prior corresponding period.

Analysts at Morgan Stanley were pleased with its performance, noting that it was in-line with expectations. And while it is warning investors not to extrapolate this quarterly performance for the whole year, the broker remains positive on the company’s medium term outlook.

As a result, it has retained its overweight rating and $10.00 price target on Dicker Data’s shares.

In addition, its analysts continue to forecast fully franked dividends per share of 43.8 cents in FY 2023 and 48.8 cents in FY 2024. Based on the latest Dicker Data share price of $8.96, this will mean yields of 4.9% and 5.4%, respectively.

The post Here are 2 growing ASX dividend shares for income investors to buy: analysts appeared first on The Motley Fool Australia.

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More reading

• Why Dicker Data, Ioneer, Monadelphous, and Weebit Nano shares are rising
• Here’s why this ASX tech share is storming 6% higher on Wednesday
• These ASX income shares have very big forecast dividend yields
• 3 ASX 300 shares being bought up by insiders
• Citi rates these ASX dividend shares as buys

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Dicker Data. The Motley Fool Australia has positions in and has recommended Dicker Data. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Hand-wringing about the next recession seems to be a common activity for those who invest in ASX shares. Most investors fear a recession, and the slump (or even crash) in share prices it can bring with it.

But in 2023, the risk of a recession does seem to be rising. For one, interest rates around the world, but particularly in the United States, have been steadily and steeply climbing over the past 12 months.

If you know anything about the history of recessions, you’ll know that most are preceded by rising interest rates. Inflation continues to be a problem, and many investors are doubtful that the US Federal Reserve can pull off the fabled ‘soft landing’ of getting inflation down without sparking an economic downturn.

It’s worth pointing out that at this stage, anything can still happen. We may see a recession later this year or in 2024, or 2025. It could be mild or severe. Or maybe we do pull off a soft landing and avoid one altogether. All scenarios are possible.

But let’s assume one is coming for the American economy, which would inevitably drag the rest of the world down with it. Which ASX shares would be best placed to weather this storm?

5 ASX shares I would buy for an American recession

If I wished to protect my capital as much as possible in anticipation of a US recession, I would look to ASX’s most defensive stocks. 

That would start with Coles Group Ltd (ASX: COL). Coles, as the country’s second-largest supermarket chain, is an inherently defensive company. No matter if there is a recession or not, we all have to eat and keep our households running.

With that in mind, Coles’ earnings base is highly defensive, which means it is a great company to hold in all kinds of economic weather. Coles’ hefty dividend would also come in handy, which the company kept raising during the pandemic.

In a similar vein, I would also look to Telstra Group Ltd (ASX: TLS). We all need to eat, but internet access is also something that most of us wouldn’t want to give up either, no matter how tight the budget gets.

Telstra’s position as the nation’s most dominant telco makes this a very strong business, which makes it another great pick for a recessionary environment. Telstra has also shown that its hefty dividend is recession-proof in recent years too.

Transurban Group (ASX: TCL) is my third pick. This toll-road operator used to be known as one of the safest dividend payers on the ASX. COVID played havoc with that reputation for a few years. But I highly doubt the next economic downturn will have us all locked indoors for months on end.

As such, Transurban’s toll roads should prove to be another inelastic and defensive source of earnings for the foreseeable future, no matter what is happening in the broader economy.

A focus on food, drinks and household items

Another investment I would turn to in order to protect an ASX share portfolio from a US recession is Rural Funds Group (ASX: RFF). Rural Funds is a real estate investment trust (REIT) that specialises in farms and food production assets. These include macadamia, cattle, and almond farms, as well as vineyards.

Again, the need to eat is not dependent on what the economy is doing, so I would feel very comfortable owning this investment in good times and bad. Right now, this REIT offers a dividend distribution yield of over 6%. Considering Rural Funds’ ability to raise its dividend every year between 2019 and 2022, I consider it to be another recession-proof investment.

Finally, let’s discuss the iShares Global Consumer Staples ETF (ASX: IXI). This exchange-traded fund (ETF) specialises in investing in consumer staples stocks.

Consumer staples shares are companies that produce or sell food, drinks and other household items (there’s a bit of a theme here). But this ETF holds companies that are listed all around the world. Some of its top holdings include Coca-Cola Co, PepsiCo, Colgate-Palmolive and Philip Morris International.

I think that this ETF can add some much-needed diversification to a portfolio, given its global orientation. And given its defensive nature, it’s my final pick for a recession-resistant portfolio.

The post 5 ASX shares I’d buy for a US recession appeared first on The Motley Fool Australia.

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Motley Fool contributor Sebastian Bowen has positions in Coca-Cola, PepsiCo, Philip Morris International, Telstra Group, and iShares International Equity ETFs – iShares Global Consumer Staples ETF. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended Philip Morris International and has recommended the following options: long January 2024 $47.50 calls on Coca-Cola. The Motley Fool Australia has positions in and has recommended Coles Group, Rural Funds Group, Telstra Group, and iShares International Equity ETFs – iShares Global Consumer Staples ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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It’s been a year and three months since Block Inc CDI (ASX: SQ2) shares debuted on the Aussie share market. Yet, the fruits of engulfing the former high-flying buy now, pay later golden child, Afterpay, have not manifested in the form of a higher share price.

Oddly, the unrewarding share price performance corresponds with an all-time high in 12-month trailing revenues as of 31 March 2023. With the Block share price nearing its 52-week low again, there’s a good chance Block is beginning to catch the attention of some investors.

As they say, a picture is worth a thousand words. That’s why I believe there are five images worth viewing before making a call on Block shares.

What is the investment case for Block shares?

Every investment should be backed by clear justification. Without a doubt, Block is competing in a crowded arena. Not only that, it’s engaging in a battle of David and Goliath proportions, taking on the largest financial institutions in the world.

So, what’s the reasoning behind Block potentially succeeding in the long run?

Going global

Although Block (formerly Square) generated US$18.56 billion in revenue for the 12 months ending 31 March 2023, its revenue by geography remains highly concentrated in the United States.

According to data sourced from its 2022 annual report, approximately 93% of all revenue was derived from the US. However, the use of digital payments and the expansion of e-commerce is not a US-only phenomenon.

In my opinion, the lack of market penetration into countries outside of the US presents an opportunity to fuel future growth. Few traditional banks provide banking services across multiple countries, offering a unique chance to build a formidable cross-border brand in financial services.

Fortunately, Block is already laying the groundwork beyond its local borders. The fintech giant grew gross profits outside of the US from its Square operations by 43% year on year to US$122 million.

Already, the company offers its payment provider services in the United Kingdom, Ireland, Canada, Australia, and Japan.

However, it’s the company’s consumer-facing product that I believe could be the biggest boon for Block shares.

A 21st-century financial operating system

Much like how Apple Inc (NASDAQ: AAPL) and Microsoft Corp (NASDAQ: MSFT) unlocked the full potential of personal computing to the masses through the introduction of user-friendly graphical user interfaces (GUIs), Block could do the same in the financial and banking services industry.

Democratising digital solutions for small and medium-sized businesses through Square could reduce the barriers of entry for many aspiring business operators. By providing a system to simplify administrative tasks (bookings, inventory management, and payments), business operators can focus on core operations.

Meanwhile, Block’s Cash App ecosystem is a modern answer to money handling. The decline of cash as a payment method continues, as illustrated in the Reserve Bank of Australia’s chart above.

For many, cash has become a burden with too many friction points compared to digital alternatives. It also can’t be used for online transactions, which are becoming all the more frequent.

While only available in the US and the UK right now, Cash App continues to experience rapid growth. In Q1 FY23, Cash App inflows increased 27% year on year to US$61 billion — pictured below.

The impressive growth of Cash App at scale is likely to appeal to anyone considering Block shares. This area of the business could sustain double-digit expansion for many years, given the tailwinds for further digital payments adoption.

What about the valuation?

It’s one thing to have a good growth story… it’s another to be trading at a valuation worth buying at. No matter how good the future is, if all of it is priced in (and then some), the potential for upside is likely limited.

Due to Block’s checkered history with profitability, the price-to-sales (P/S) ratio is a more suitable tool for some fundamental analysis.

On this basis, Block shares are trading at their lowest multiple since early 2017. The company is valued similarly to Tyro Payments Ltd (ASX: TYR) at a P/S multiple of around two times, as shown below.

For reference, Block’s revenue has increased by nearly 11 times since late 2016. Nevertheless, the market appears unwilling to pay a greater premium while profitability proves to remain elusive.

Why I’m still a little cautious about buying more Block shares

The market opportunity to become a household name in banking and financial services across the globe is an enticing prospect. However, Block shares are not without their thorns.

Any good investor should be aware of the uglier aspects of a business before committing to investing.

For me, a glaringly obvious piece of baggage that comes along with Block right now is the enormous amount of stock-based compensation (SBC). A total of US$279.59 million (AU$417.69 million) worth of stock-based compensation was incurred in the latest quarter alone.

The company uses this to aid in retaining its talented employees. However, the fact that SBC is rapidly growing over time is concerning, as shown above. Especially when this amount is added back into operational cash flow.

There are differing opinions over the treatment of SBC. Personally, I think it is important to look at cash flow excluding SBC. When doing so, Block’s cash flow from operations in the latest quarter would be a meagre US$14.81 million from US$4.99 billion in revenue.

Overall, that is the biggest ‘must-know’ detail for anyone considering buying Block shares, in my opinion.

The post 5 must-see images for anyone considering Block shares appeared first on The Motley Fool Australia.

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More reading

• Here are the top 10 ASX 200 shares today
• Why ANZ, Block, Pilbara Minerals, and SSR Mining shares are storming higher
• Block share price charges higher on strong Q1 result and guidance
• Down 37% in a year, fundie says Block shares offer ‘very attractive rate of return’
• Here are the top 10 ASX 200 shares today

Motley Fool contributor Mitchell Lawler has positions in Apple and Block. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Apple, Block, Microsoft, and Tyro Payments. The Motley Fool Australia has positions in and has recommended Block. The Motley Fool Australia has recommended Apple and Tyro Payments. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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