It boils down to this one thing.
Block (SQ 2.90%) stock has seen some wild swings over the past few years, skyrocketing and then tanking. Customers love its products, and the company has demonstrated consistent revenue growth throughout most of its lifetime. But it has struggled with profitability, and its seeming obsession with Bitcoin has scared some investors off.
Does it deserve a space in your portfolio?
A company with excellent products
Block operates two main businesses: Square, its original seller’s business, and Cash App, a personal finance app with payments, bank accounts, and more. Both businesses offer easy-to-use services that provide innovative and tech-based solutions to real problems.
The seller’s business offers payments and management solutions to help small businesses operate more efficiently. One recent breakthrough on the platform is the ability to accept payments even when there are connectivity issues. That’s a real benefit that serves frustrated customers, and Square has a strong track record of delivering these kinds of services that make life easier for its users.
Square’s revenue increased 11% year over year in the 2024 first quarter. Like many similar businesses, most of its revenue comes from transactions, which is mostly payment processing. Transaction-based revenue accounted for 81% of the total.
The Cash App business accounts for the majority of sales, at 70% of the total . Management is strategizing for Cash App to become more of a full-service bank app, with one of its objectives to “bank our base,” and the other two to service families and become a “social bank.” Sound familiar?
It definitely looks like it’s talking a page out of the SoFi Technologies playbook. This makes sense considering SoFi’s excellent performance and Cash App’s similarities and base of millennial customers. Cash App revenue increased 23% year over year in the first quarter.
But is it an excellent business?
Block has incredible potential and was the kind of growth stock investors loved when it first came onto the scene. It’s truly disruptive and innovative and was growing fast. It struggled early in the pandemic when small businesses were closed. Even though it has recovered to some degree, its stock is down 75% from its highs in 2021 and is about flat over the past five years.
Two parts are turning off investors. One is Block’s major problems with profitability. Instead of becoming profitable at scale, it was bleeding through more and more cash.
A few months ago, management said it was getting serious about cost-cutting, and that seems to be working. It slashed the head count, with a commitment to remain below 12,000 for the near future. It has turned to automation and artificial intelligence (AI) to better use its resources and reported $250 million in operating income at a 12% margin and $472 million in net income in the 2024 first quarter.
That’s a welcome update. Even though Block needs to demonstrate sustained profitability to please investors, it’s on the right track. So why is Block down 10% this year, even after a positive earnings report?
That brings us to the second reason investors are wary, and Block didn’t do itself any favors in the first quarter when addressing it. And that’s Bitcoin.
A bet on Bitcoin
Block began to buy Bitcoin back in 2020, although it has been interested in it from early on. It offers Bitcoin trading through Cash App, which it counts as revenue.
Without Bitcoin trading, Cash App revenue increased 18% in the first quarter. That’s still a good showing, but Bitcoin accounts for a not-insignificant amount. In other quarters, it has made a more substantial difference.
Block has invested in Bitcoin and blockchain in other ways, as well, such as Spiral, which “builds and funds free, open-source projects that advance the use of Bitcoin as a tool for economic empowerment.” It also invested in TBD, which “is building an open developer platform to make it easier to access Bitcoin and other blockchain technologies without having to go through an institution.”
In his shareholder letter, CEO Jack Dorsey said he gets asked all the time about why Block, which changed its name from Square to signal its trajectory, is investing so heavily in Bitcoin. He gave a several-page-long explanation about how he sees Bitcoin as the native currency of the internet and why it’s going to be crucial for digital financial transactions. He also said Block uses less than 3% of its resources on Bitcoin-related projects.
In other words, instead of deliberate consideration about how the Bitcoin ventures are scaring away shareholders, he doubled down on the premise.
Now, I’m not a prophet, and I have no idea if he’s right or wrong in his thinking. But I do know that if you run a public company, part of your mission is to create shareholder value. Any investor interested in buying Block stock will know in advance that they’re investing in Jack Dorsey’s management — for now, at least. People who believe in his vision will invest, but those who don’t aren’t going to be encouraged by what looks like a risky play.
That’s what this boils down to. If you believe in Dorsey and his bet on Bitcoin, you might want to buy shares of Block stock. The company is doing well, with increasing sales and profits moving in the right direction. The stock is cheap, trading at only 1.9 times trailing-12-month sales.
But if you aren’t ready to embrace Bitcoin as a global money-moving approach, you should probably stay away from Block stock right now.