Block (Square) Has Plunged 65% From the Highs -- Is It a Buy?

Block (SQ -0.25%), better known as Square, has dramatically underperformed the stock market in the recent downturn, with shares plunging by more than 65% from the 2021 highs. In this Fool Live video clip, recorded on Jan. 27, Fool.com contributors Matt Frankel, Jason Hall, and Will Healy discuss whether the stock could be worth a closer look for patient long-term investors. 

Matt Frankel: Block is down by roughly 62% from its highs, and this is not one that really went meme-stockish it was a stock that was up on its own merit. If you look at the business, just the growth of the business in recent years, there's no reason it shouldn't still be up. In fact, it hit its high in mid 2021, during the summer, about $285 a share.

Since then, the reasons to buy the stock, in my opinion, have increased. Jack Dorsey stepped down from Twitter and now is solely focused on the company, for one thing. The business keeps growing in all the right ways. They're gaining a lot of traction in omnichannel, for example. Their Afterpay acquisition is about to be completed, which will bring a whole new millions of customers into their ecosystem.

Their Afterpay acquisition, by the way, is another kind of like the Lemonade and Metromile deal is an all stock deal. Now that Block shares are down by 62%, they are effectively getting their Afterpay for a lot less. I know Jason and I on a show said that $29 billion was a ridiculous valuation to pay for Afterpay. Now they're paying like $12 billion because they are just paying in Square stock or Block stock, I keep saying both. But let me quickly share my screen. There it is.

Jason Hall: So basically we can all agree that Block is a terrible name. Let's just go with that.

Will Healy: Well, I don't know if it's a bad name, but it's a pointless replacement. Yeah, I know they're trying to get the blockchain.

Frankel: I don't want to cause controversy, I know there's a lot of crypto believers on watching the show. I've said that the focus on Bitcoin and cryptocurrency and stuff like that is probably my least favorite part of block. Not really a knock on cryptocurrency in general. I just like the rest of its business a whole lot better. I think there is enough opportunity in the core seller and personal ecosystems, the Cash App and everything to really get me excited all by itself, I don't need you to add to it.

Healy: I agree completely and it's only in about seven -- I think they're adding Spain. Once they add Spain it will only be in eight countries. So once they get to the rest of the EU and maybe start going into developing countries. I mean, there's, some huge potential there.

Frankel: Speaking of that one of the countries they have a decent but not a big presence in is Australia where where Afterpay is based and lot of Afterpay's customers are. So, this instantly like boosts their presence in Australia and brings all those people have to Square's ecosystem as well. I'm just going to go ahead and refer to it as Square for the rest of this discussion just so I don't have to keep correcting myself.

But if you're looking at your screen, this is Square's gross profit since 2015, which is when it went public. Unlike some of the other ones we've talked about on the show, Upstart and Shopify. I didn't miss the boat on Square. I've been following this one since the beginning. I always say I invested in Square since before it was cool to investment Square. Shortly after its IPO, it was being called a failed IPO. The stock was doing that poorly. Everyone thought of it is just a niche payment processor company.

At the time it was little more than the little Square card readers sticking out of people's iPhones. I think they had just branched out into actual POS terminals. The Cash App, as you can see from there, the green is Cash App revenue was nonexistent then when they went public. That's something that the whole Cash App ecosystem has been built in the past four years essentially, which is remarkable when you consider how big it's become. In 2021, I'm pretty sure Cash App revenue, we'll find out in a couple of weeks. But Cash App gross profit will have overtaken the seller ecosystem as the biggest part of the business.

This includes not only the person-to-person payment capabilities, but all these adjacent services they keep adding over time. You can buy and sell Bitcoin through the Cash App. You can buy stocks through the Cash App. It's a Robinhood competitor in that way, in that it's just an easy-to-use way place to buy stocks. They have a debit card, they have direct deposit and there's a lot that they can add over time, especially because Square just got a banking charter this past year since it hit its high.

It has started Square Financial Services. It's a chartered bank, currently providing some small business lending and services like that. But creates a ton of possibilities for the Cash App, which Square has said, they've wanted the Cash App to do pretty much everything for you that your bank can do. It doesn't do that yet. So, there's a big opportunity here to grow the Cash App. Here's what they see their market opportunity as. Look at the market penetration there, 3% of the seller ecosystem, 2% of what they see on the individual side and this is a growing addressable market, too. This doesn't include buy now pay later.

This presentation was made before the Afterpay acquisition was announced. It doesn't include, as we'll mention, expanding into other potential markets over time. Out of that seller ecosystem it says $100 billion, $85 billion of that is just U.S. They're not even considering the big international opportunity in that number. So, I think this company is still in the very early stages and for me, if their blockchain ambitions end up producing anything significant, that's just icing on the cake. That's just a bonus to me. I think their core business is promising enough on its own.