Shares of financial technology stock Block (SQ 0.78%) are trading 65% off highs of just a few months ago, even including its bounce after a very strong earnings report. Not only are investors selling growth stocks, but they've also been abandoning companies like Block who were seen as beneficiaries of the pandemic's shift to e-commerce.
But the recent earnings report shows that Block may be better off than investors previously thought. The company's seller business is doing well, the consumer business is booming, and there are growth opportunities in crypto on the horizon as well.
Image source: Block.
Sellers are sticking with Square
The volume going through the Square side of Block's business is impressive. Gross payment volume in the fourth quarter of 2021 was up 45% to $42.6 billion, driven by sellers with over $500,000 in transactions seeing their payment volume nearly double year over year to $15.7 billion.
Square's revenue jumped 49% in the quarter to $1.47 billion, and gross profit was up 54% to $657 million. These are coming off some weak results in the middle of the pandemic, but two-year growth on a compound annual basis was 25% for Square's revenue and 32% for gross profit. In any environment, those are impressive growth figures.
NYSE: SQ
Key Data Points
The Cash App is booming
In the fourth quarter, the Cash App was really the most important business for Block. Its revenue rose 18% to $2.55 billion, and gross profit was up 37% to $518 million.
Bitcoin still accounted for a majority of the Cash App's revenue at $1.96 billion, due to the fact that Block accounts for each Bitcoin sale as revenue. But activity on the app is impressive, with business payment volume up 45% from a year ago to $3.8 billion.
The idea for Block is for the Cash App to be where people keep funds and start transactions online and even in person. So, the more people are on the platform and the more transactions they make, the better it is for the business long term.
Square's dependence on transactions is shrinking
Block makes some money on transactions on its ecosystem, but it's tied to credit card companies and banks who make most of the money on transactions themselves. That's why the company's subscriptions and services business is an important indicator of the company's health.
In the fourth quarter, management said subscription and service revenue was up 72% to $772 million and gross profit from the business was a whopping $622 million.
If new transaction systems like cryptocurrency replace the credit card and bank infrastructure used today, Block would still make this subscription revenue, so this is a key to the company's business.
Block's stock is looking cheap
By many measures, Blocks' stock is cheaper than it has been in years. The price-to-sales ratio is just over three and the company is now profitable and should continue growing the bottom line as it leverages the software and user base it has built.
SQ Revenue (TTM) data by YCharts.
The upside from here is from Block's continued growth on the Square and Cash App ecosystems. They're both growing independently, but I think they will add increasing value by working well together. If Block can pull off a new financial ecosystem within these apps, it could disrupt digital finance -- and that's a trend worth investing in today.
