Investors have soured on Block (SQ 0.18%) in recent months. Part of the decline stems from a generalized sell-off in growth stocks. Also, many investors do not like Chief Executive Officer Jack Dorsey's Bitcoin (BTC 1.47%) bias, especially after the cryptocurrency's 37% plunge from its November peak.
However, Block stock could still prosper over time. Even if its Bitcoin strategy fails to gain traction, three critical tailwinds will likely be in the fintech stock's favor.
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1. Market expansion and Block's true rising currency
For all of the focus on Block, the new currency poised to boost the company is not Bitcoin but the euro. According to the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the share of dollar global payments has fallen slightly as the euro's share has risen.
Data source: SWIFT
As the use of the euro has trended higher, so has Block's involvement in the region. Until 2021, Block's presence in the eurozone consisted of an office in Dublin. Since 2021, it has introduced its ecosystem to Ireland, France, and Spain.
Block tends to buy companies in countries as a precursor to beginning operations. It bought Verse before later taking its ecosystem into Spain. In 2020, Dorsey made an investment in Italian fintech Satispay according to Bloomberg, possibly laying the groundwork for a move into Italy. It is also likely that the company's foothold in the eurozone will eventually bring Square's ecosystem to that entire region. Such growth could drive the company for years to come.
2. The Square ecosystem
Also, amid that expansion, investors should keep in mind the depth of Block's Square ecosystem, particularly in the U.S. The fintech has moved well beyond enabling card payments on smartphones. Today the Square ecosystem includes point-of-sale, payroll services, social media channels, marketing, and app development capabilities.
However, its most significant expansion is arguably gaining a charter to open a bank. Operating a bank means it can offer checking and savings accounts. Also, Block no longer has to seek a third party to loan money via Square Capital, giving it a competitive advantage over most peers.
More importantly, a business can handle all finance-related functions within the Square ecosystem. This places Block in an advantageous position as traditional finance and fintech become increasingly intermingled. The Square ecosystem generated a gross profit of $2.3 billion in 2021, a 29% two-year compound annual growth rate (CAGR).
NYSE: SQ
Key Data Points
3. Cash App
Block also directly serves consumers through its Cash App payments platform. Users can collect and spend money on the app and obtain a debit card tied to their Cash App accounts. It also facilitates investment, allowing users to buy and sell stocks. These investments include the purchase and sale of Bitcoin.
Additionally, it has made significant strides against its main competitor, PayPal's (PYPL +1.25%) Venmo, despite the latter's first-mover's advantage. Venmo claims over 83 million users in the U.S., compared with more than the 70 million users Cash App reported as of last August. Cash App reported only 44 million of those users were active as of the end of 2021, indicating an opportunity to increase user engagement.
NASDAQ: PYPL
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Cash App also prospers in terms of innovation and driving revenue. Its Bitcoin offering forced Venmo to later offer cryptocurrency capabilities. Moreover, Cash App's Cash Card earns revenue from purchases on the card. In 2021, Cash App earned a gross profit of nearly $2.1 billion, an increase of 113% on a two-year CAGR basis.
The state of Block
Overall, the rapid growth of both the Square ecosystem and Cash App could make Block your next cash cow. Cash App continues to generate massive growth while making strides against Venmo. Also, the Square ecosystem should benefit from synergies with traditional finance and its expansion. However, it should not surprise investors if eurozone expansion makes the euro a more important currency on the platform than Bitcoin.
