Financial technology, otherwise known as fintech, has been one of the hottest investing themes of the past decade. One of the most innovative fintech companies to come out of the last decade is Block (SQ 1.40%), formerly known as Square. The company operates both a merchant and consumer fintech platform, and its stock is up over 800% since its initial public offering in 2015. But recently the shares have taken quite a tumble, down 53% in the past 12 months.
Here are two reasons to buy Block stock, and one reason to sell.
1. Strong growth at Cash App
Block has two main pillars. First, let's discuss the consumer pillar, Cash App. Cash App is a mobile application that allows people to send money to other users, access a free debit card, and perform many other quasi-banking activities.
In Q4 of 2021, Cash App increased its number of monthly transacting customers by 22% year-over-year to 44 million. More importantly, the app now has 13 million active users of the debit card called the Cash Card, or 31% of its total transacting customers. This is up from 26% of transacting customers in the fourth quarter of 2020. The growth of the Cash Card is important because Block earns a small fee for every dollar spent through the card.
All this user and Cash Card growth drove gross profit at the Cash App up 37% year-over-year to $518 million in Q4. If the company can continue executing in acquiring new users and getting existing customers to spend more through the app, this high rate of growth should continue for the foreseeable future.
When talking Cash App, we also shouldn't forget to mention Block's recent acquisition of Afterpay. Afterpay is a popular buy-now-pay-later (BNPL) service based in Australia. Block bought the company in a sizable all-stock deal where Afterpay shareholders got 0.375 share of Block stock for every one share they owned. Part of the thesis for the acquisition is that Block can easily integrate Afterpay's BNPL solution into the Cash App and create even more monetization opportunities for its 44 million monthly transacting users.
2. Resurgence of in-person activities
Block's original business (and why it was called Square) is its Square seller ecosystem. The Square subsidiary offers financial solutions for businesses like payment terminals and credit card readers, software for selling things online, back-office management tools, and now Afterpay's BNPL products.
Since Square earns revenue whenever someone swipes at one of its terminals/card readers, and because it skews toward in-person payments, the business was hit badly by the COVID-19 pandemic. However, with in-person activities steadily coming back to normal (at least in Square's core Western markets), that headwind has now turned into a tailwind. For example, in Q4 of 2021, Square's gross profit rose 54% year-over-year to $657 million, outpacing growth at Cash App. With a diversified merchant base of small, medium, and large businesses in many countries around the world, Square will thrive if the pandemic finally recedes. Plus, since it earns revenue as a percent of dollar volume, it is permanently hedged against inflation risks.
One reason to sell
The most common reason to stay away from a high-quality growth stock is valuation. But in this case, I think the biggest reason to sell is something else: management.
Block was founded and is still run by eccentric Chief Executive Officer Jack Dorsey (who also was on the founding team at Twitter). You can't do anything but tip your hat to the guy for helping build two powerhouse businesses (Square and Cash App) that now sit under the Block umbrella. But I am worried about his love of cryptocurrencies and its seepage into Block's business. About 5% of the company's balance sheet is now in Bitcoin, it has a subsidiary called Spiral that funds crypto projects, and it has a "TBD" subsidiary that is "building an open developer platform to make it easier to access Bitcoin and other blockchain technologies without having to go through an institution."
This is not to say that embracing crypto is guaranteed to fail for Block. It is entirely possible Spiral or "TBD" could be bigger than the Cash App someday. But given how unproven the crypto industry is, it adds a lot more risk to an investing in the stock. This is the main reason I'm staying away from Block stock right now.