Jack Dorsey's been busy. The tech visionary stepped down as CEO of Twitter on Nov. 29, and a day later, his other company announced it would soon change its name from Square to Block (SQ +0.39%), a move that's now official. This follows Meta Platforms' name change in October, from Facebook, in an effort to identify with the developing metaverse.
Is Square's new identity a deeper foray into the metaverse as well? And what does that mean for the company?
Cryptocurrency and more
The fintech pioneer has evolved from its humble beginnings as a financial solutions provider for small businesses into a large organization targeting both businesses and individuals. Along the way, it's become a champion of cryptocurrency, specifically Bitcoin, as a native internet token. The next stage of the company's growth begins with its change in identity from Square, a name associated with its seller business, to Block, a name that goes beyond any of its building-block businesses but evokes a strong cryptocurrency feel.
Image source: Getty Images.
As it stands, the seller business has receded in importance as part of the whole, accounting for just over a third of total revenue in the third quarter. That portion did, however, boast a 44% revenue increase as small businesses rebounded from the pandemic and a 45% gross margin as compared with 29% for the company as a whole.
Bitcoin trading, which the company counts as revenue, again provided nice padding for total revenue. It added $1.8 billion, or 75% of total Cash App revenue.
The company itself is making significant investments in Bitcoin, having purchased more than $200 million. Following up on that, it launched peer-to-peer Bitcoin payments at the beginning of this year, and it also funds open-source Bitcoin development through what was formerly known as Square Crypto and has been renamed Spiral.
Dorsey has long been a champion of Bitcoin. He uses it as his hashtag on his personal Twitter account and frequently tweets about it, and he also mentioned in July that it would become a bigger part of the Twitter program. On Square's third-quarter conference call, he was pretty clear: "Our focus is on helping Bitcoin to become the native currency for the Internet."
What is Block?
The company sees the name Block as encompassing many aspects of what it is trying to accomplish: building blocks, block parties, community blocks, coding blocks, challenges to overcome, and, last but certainly not least, blockchains. It touts economic empowerment and access as its raisons d'etre, and envisions all its parts -- the seller business, Cash App, Spiral, and Tidal (its music platform) -- working together toward these goals.
They are strikingly similar to the goals of cryptocurrency in general, which is based on decentralized finance, or DeFi, and operates without a central authority. And crypto is the currency of the metaverse, which is meant to provide equal opportunities for whoever wants to get into the game. Block may well see itself as a leader in this effort, providing more opportunities for people to manage financial transactions while increasing its own revenue.
For now, nothing has changed in the company save the name. However, there are two things for investors to keep in mind. First, with Dorsey's departure from Twitter, he may very well use the newfound focus on Block to take the company in a new direction. Second, the name change signals a shift in management's thinking about its role in the new economy, which may dictate future action. This could lead to innovation and benefit investors, but it also places new risks on shareholders, who need to understand how the company is changing.
Block has rewarded investors, gaining 1,200% over the past five years. However, at Monday's prices, it's declined 18% over the past year. Overall performance has fluctuated as the seller business is hurt by the pandemic and Bitcoin is affected by cryptocurrency volatility. As the company moves toward cryptocurrency, and possibly the metaverse, that exposes Block to greater volatility. While it enjoys the same opportunities that it did before the switch, investors should take note of the increased risk.
