Financial technology (fintech) company Block (SQ -1.57%) has multiple business segments, but arguably none more important than its Cash App ecosystem. In 2019, Cash App accounted for just 25% of the company's total gross profit. By 2021, Cash App's gross profit was 350% larger and accounted for nearly half of Block's total gross profit.
In short, Cash App is fueling an outsized portion of Block's growth. And while growth has been white-hot, it could get even hotter as management sets its eyes on international markets. Here's why.
Cash App is the top U.S. finance app
On July 13, third-party research company Apptopia released a report on the most downloaded finance apps through the first half of 2022. PayPal Holdings (PYPL 0.64%) stole the headlines, being the most downloaded finance app in the world with 49 million downloads, way ahead of fourth-place Cash App, with 35 million downloads.
However, the global comparison isn't fair. PayPal is more mature and has already expanded internationally. By contrast, just 3% of Block's revenue in 2021 came from international markets. And Cash App is only available internationally in the U.K., while it's available in Spain under the name Verse. Therefore, with such little international expansion to date, it's not surprising to see Cash App downloads lag PayPal worldwide.
Cash App offers services like peer-to-peer transfers, stock brokerage, paycheck direct deposit, and much more. And what it lacks internationally, it more than makes up for in the U.S. market. Apptopia's report showed Cash App takes the top spot in the U.S., with twice as many downloads as PayPal so far this year and nearly three times more than PayPal's Venmo.
Block's management shared some stats in its May investor presentation that should make investors excited about the business of Cash App. First, its cost to acquire a new customer is just $10 -- a fraction of what traditional banks pay, likely thanks to word-of-mouth marketing. This suggests Cash App benefits from network effects (keep that in mind). In other words, the more people who use Cash App, the more likely others will join to connect with people they know.
With such cheap customer acquisition costs, Cash App is fueling Block's gross-profit growth, as mentioned. And it's only improved as the company has added more personal finance tools and services to the ecosystem. In the fourth quarter of 2016, quarterly gross profit per monthly active customer was just $5. In the fourth quarter of 2021, it was $47.
Chart shows five-year-growth rate for Block's overall gross profit, not just the Cash App segment. SQ Gross Profit (TTM) data by YCharts
With metrics like these, I think you'll agree that Cash App is a great business. And I believe it could quickly take the world by storm -- just like it has the U.S.
Setting its sights on the world
In March, over 50% of Cash App activity in the U.K. was cross-border to the U.S. This reality has Block's management realizing it can leverage network effects to grow Cash App internationally the same way it's grown domestically. And the key is the buy now, pay later (BNPL) company Afterpay.
In January, Block completed its $29 billion acquisition of Afterpay -- a move I've criticized for its price tag. For perspective, PayPal built an in-house BNPL product for a fraction of the price. Also consider that privately held competitor Klarna has seen its valuation drop 85% in the past year, suggesting Block bought into BNPL hype. However, if there's a silver lining, it's Afterpay's user base of over 20 million and its large international presence.
Unlike Block's Cash App product, Afterpay got its start internationally in Australia. However, it was able to scale quickly in North America and Europe as users clamored for cross-border capabilities. This is the same dynamic management is seeing play out with Cash App in the U.K right now.
From Block management's point of view, the acquisition of Afterpay was the final piece of Cash App's international-expansion puzzle. Now that it's complete, Afterpay will be rolled into the Cash App ecosystem and will accelerate its entry into various global markets. The hope is that international consumers will adopt Cash App to network with Afterpay's international user base and Cash App's user base in the U.S.
If Block can truly leverage network effects internationally, I expect Cash App to take the world by storm. And as users join the ecosystem, the company will be able to monetize them at a healthy profit margin. Over the long term, rising profits drive stock performance. Therefore, this international growth opportunity is a primary reason I continue to hold my Block shares with a closed fist.
