Investors should keep an eye on spending and profitability.
Block (SQ -0.39%), in its original iteration as Square, was an investor’s dream. It offered innovative, disruptive technology for businesses, and it followed up an enticing premise with new products and services that met its customers’ needs. Investors poured in, and the stock had soared more than 2,000% by the time it reached its highs in 2021. It has since come crashing down, and it’s now trading 74% off its highs.
Let’s see how things are going at Block, and where it might be a year from now.
Delighting its core customers
Block is still reporting growth from its two “ecosystems”: the Square sellers business, and the Cash App personal finance app.
Square offers software and hardware packages for small and medium-size businesses that automate and unify many processes, such as accounts payable, accounts receivable, inventory, and payment processing, creating an easily managed, efficient operation.
Customers say they love its flexible, easy-to-use platform. For example, some of its customers don’t fit into a pre-packaged category like a restaurant or grocery store — they might have a bit of both. Square’s platform allows them to customize their software.
Block has been focusing on capturing market share from larger businesses, a more lucrative market that has higher gross payment volume (GPV). Total GPV increased 9% year over year in the first quarter, and total revenue increased 11%.
It’s likely to continue on this trajectory for at least the next year, attracting new, larger customers and reporting higher revenue and gross profit. Management sees a $130 billion market opportunity and only 5% penetration, so this business offers almost endless opportunities for a company like Block that knows how to pinpoint needs and create real solutions.
Cash App is equally popular, providing user-friendly digital services to manage money. It’s known for its peer-to-peer payment services, but it now also offers investments, bank accounts, and more. Block is trying to turn Cash App into a full financial services app that appeals to a broader demographic beyond its core of millennial users.
Revenue from the Cash App segment increased 23% year over year in the first quarter. Block sees large opportunities in converting members to different services on the app and increasing overall engagement with the platform. It’s working to get customers to move over their financial transactions to Cash App and use it for things like paying bills and direct deposit. A year from now, this business should still be growing at double-digit rates and offer even better, targeted services for this population.
Betting on Bitcoin
The elephant in the room here is Bitcoin. Block has invested in Bitcoin in several ways, beginning with buying $220 million worth over the past few years. CEO Jack Dorsey sees the need for a decentralized, native currency for the internet, and he thinks that’s going to be Bitcoin.
Dorsey is a visionary leader, so there’s reason to be confident about his approach. He created Block as well as Twitter, which he stepped away from to focus on Block.
Block has developed several initiatives in efforts to bring Bitcoin into people’s lives. Dorsey sees this as working together with the mission of Block to create an open, democratic financial system to improve the economy for everyone.
Bitcoin plays a role in Block’s revenue, since it counts Bitcoin trading on Cash App as revenue. With Bitcoin, revenue increased 19% year over year in the first quarter, and without Bitcoin trading, it increased 14%.
Block’s performance over the next year will be partially influenced by how Bitcoin does — not only in its own price movement, but in the public’s acceptance of it. Dorsey said that investments in Bitcoin-based products only take up 3% of Block’s resources, and Block’s main businesses are performing well without it.
Making it all work together
Block is still growing its businesses, but it has struggled with profitability over the past few years. It reported strong progress in the first quarter, with positive operating income and net income. Gross margin on the basis of generally accepted accounting principles (GAAP) has improved from lows, but it’s still below pre-pandemic levels, while operating margin has surpassed them.
SQ Gross Profit Margin (Quarterly) data by YCharts
Management made a commitment to get costs under control, and it’s demonstrating results. This is what investors need to watch over the next year. If profitability continues to improve while revenue grows, Block will be in an excellent place and the stock should rise.
Given that, you might think that Block stock would have soared after the first-quarter report. It didn’t, because investors are still wary of the Bitcoin focus. Keep that in mind when considering buying Block stock and trying to guess where it will be a year from now.