Fintech innovator Block (SQ -1.57%) has gone from pandemic darling to post-pandemic goat with shares down 61% this year and nearly 80% below last year's all-time high. A combination of investors transitioning away from high-flying growth stocks, rising interest rates, and its own disappointing performance resulted in Block getting squashed. 

Yet that's throwing the baby out with the bathwater, which creates an opportunity for agile investors. Block has relied on its seller ecosystem as its primary growth vehicle for over a decade, but today it's a much more diverse tool for payments, making its severely discounted stock one that should be looked at more closely.

Couple making contactless payment.

Image source: Getty Images.

Cashing in on payments

Block's third-quarter earnings report was an eye-opener. It crushed expectations across the board, with revenue rising to $4.52 billion versus forecasts of $4.49 billion, generating adjusted earnings of $0.42 per share against estimates of just $0.23 per share. Heck, it was almost break-even on a GAAP basis.

Gross profits also soared 38% to $1.57 billion, ahead of Wall Street's $1.53 billion guess, due to surprising strength in the face of strong headwinds for many of its peers. Point-of-sale profits were up 29% to $783 million, but the real star was Block's Cash App, which saw gross profits rocket 51% higher to $774 million, representing a three-year compounded annual growth rate of 84%.

Cash App gross profits chart.

Image source: Block.

Users are adopting the Cash App in droves, ending the third quarter with 49 million users and a record $52 billion of inflows. And just as Block itself has expanded its functionality over time, so has the Cash App ecosystem.

One of those extensions is with Block's Cash App Card, which is a free debit card that allows users to make transactions and withdraw the funds available in their Cash App account. There were nearly 18 million Cash App Card users in September, up more than 40% year over year, which now represents 35% of its total number of monthly active app users. On a weekly and daily basis, the number of actives using the card rose at an even faster rate.

It shows Block has an increasingly important product that's popular with users and can create a critical mass of tens of millions of users over time. 

According to CEO Jack Dorsey, "Over time, we want to work toward being primary because everything that you need in your financial life, you can find within Cash App. So that is the goal. That's what we're focused on, and I think we have the best strategy to get there."

A portal to bigger profits

Cash App has become the gateway tool for users to go deeper into the Block ecosystem. Not only is it possible to transfer money to friends, but they're able to perform banking functions, such as setting up direct deposit, and buying stocks or Bitcoin.

"We don't have the data on whether we're primarily against other credit cards or other banks, but that is certainly our goal," Dorsey said.

CFO Amrita Ahuja echoed those points, noting that ease of use was a critical factor in its growth. "We believe driving inflows per active [user] starts with customers' ability to easily fund their Cash App accounts through a variety of channels."

Block is spending to grow the business, with subscription and service-based costs rising 76% to $226 million. But revenue resulting from those expenses was up 71% to $1.2 billion, so the payoff is worth it. Block is a growth stock that's still growing.

More ways to grow

If there was one drag on the company, it's having tethered itself so closely to Bitcoin. It recorded a $2 million impairment on Bitcoin it purchased in 2020 and 2021, which follows a $36 million impairment in the second quarter.

At the end of September, the fair market value of Block's bitcoin investment was $156 million. Bitcoin's price is down 8.5% since then.

Despite this, Block has plenty more growth levers to pull in the quarters and years ahead, including its recent buy now, pay later platform Afterpay, though rising interest rates could raise concerns of consumer defaults. Still, Block offers a suite of top-grade products that are just beginning to hit their stride and should give investors confidence in its ability to keep expanding.