Is Block Stock a Buy?

Block (SQ -1.07%) stock, formerly Square, was a dynamo growth stock before losing investor confidence in the last bear market. But unlike many other stocks, it hasn’t recovered at all from that time. In fact, it continues to fall. Let’s see why and whether or not this presents a buying opportunity.

Innovation fuels this financial disruptor

Block burst onto the financial scene with its little white, square-shaped card reader that became a game-changer for small businesses. It made accepting payments much easier for these clients, and it sparked a revolution of small business solutions that have leveled some of the playing field for businesses to be able to compete with bigger companies in a meaningful way.

Today, the seller’s business offers a variety of small business services that simplify management. It also operates a personal financial business, Cash App, that’s also become a popular option.

Despite steady growth in both of these segments, though, Block has been struggling with profitability. Management has turned its focus to cost-cutting and righting its resource spend, and the picture is beginning to improve. In the first quarter, revenue increased 19% year over year, with strong results in both the Square seller’s business and Cash App. Operating income was positive for the first time in several quarters, with a 12% margin, and net income was a positive $472 million.

Block is known as a disruptor and innovator, and it continues to bring out new and improved products and services that achieve its goals of making it easier to manage money. That goes for both businesses and individuals. Some of the recent enhancements for the Cash App business include a Cash App credit card and buy now, pay later services through its acquisition of Afterpay. It also offers bank accounts, and it sees Cash App as a complete financial services management solution. It’s looking to grow the segment by moving “upmarket” and targeting families as well as connecting the Cash App and Seller’s ecosystems for greater flexibility and broader solutions.

Some new improvements for the seller’s business include accepting offline payments, which anyone who’s ever tried to buy something from a store that’s having connectivity issues will tell you is brilliant, and adding artificial intelligence (AI) tools to automate many processes.

Is it taking the disruptor spirit too far?

Clients really like Block’s services, which consistently score high on professional and customer satisfaction surveys. It should be able to keep growing and capturing market share.

Management has been tackling the profitability issue, and so far, it seems to be going well.

But it has another problem that’s turning investors off: its focus on Bitcoin. CEO Jack Dorsey claims that less than 3% of Block’s resources are used for Bitcoin-related projects and are amply covered by the money the company makes from its Bitcoin platform. But this is a clear area that management is interested in developing, and many investors have already been either burned by, disillusioned by, or are simply uninterested in cryptocurrency. Those who see it as the future of finance have other ways to invest in it, and those who consider it speculative don’t want it, as a large part of their investments in normative financial technology.

So, while Dorsey is playing down Block’s exposure, he’s still passionate about it and enthusiastic about developing Bitcoin projects. And although it may account for whatever percentage of resources he claims, it has an outsized impact on the company’s financials. Without Bitcoin trading, revenue increased only 14% year over year. On top of that, Dorsey said that going forward, Block would invest 10% of its gross profit in Bitcoin purchases.

Where does that leave investors?

So, back to our original question: Is Block stock a buy? I think that Block has an excellent business with a strong long-term outlook. It’s taking many of the right actions to become more efficient and boost the bottom line. However, you’d have to believe that its pivot to (obsession with?) Bitcoin is just a side quirk and won’t steal the show from the lucrative, popular, and stable financial ecosystems. If you’re willing to overlook that and have confidence in the core business’s underlying value, Block could add some growth power to your portfolio.

The market doesn’t see it right now, and Block stock is down 22% this year. It would be a contrarian call, and you’d need to assess your risk level before deciding that this stock fits into your investing goals. Risk-averse investors should bow out for now.

Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin and Block. The Motley Fool has a disclosure policy.

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