Since August 2021, Block (SQ 5.04%) (formerly Square) has shed almost three-quarters of its value, yet it's roughly at the same price levels it was in January 2020 before the bear-to-bull market experienced during the COVID-19 pandemic. Block's various businesses will likely be sensitive to macroeconomic conditions in the near future, but that shouldn't deter long-term investors.
With Block stock down 62% this year, here's why it's a buy before 2023.
The Square ecosystem is strong
Block's bread and butter has always been its Square ecosystem, which aims to make the financial side of business easier for companies. What started as point-of-sale (POS) hardware that made it easier for businesses to accept payments has grown into a full suite of services that cover commerce, banking, staff, and customers.
Square's commerce products include its POS products like Square Register and Square Terminal, as well as products that cater to specific industries like retail and restaurants. For businesses looking for easier and more streamlined ways to manage their money, Square's financial products can be a go-to, offering checking, savings, debit cards, and loans. Square's staff services handle payroll, automated tax filings, and employee benefits, and its customer-focused products help businesses execute loyalty programs, marketing, and gift cards.
After first catering to small businesses, Square has expanded and proven it can be a one-stop shop for small, midmarket, and many large businesses. Midmarket businesses -- companies making at least $500,000 in annual revenue -- accounted for 40% of Square's gross payment volume in its third quarter of 2022, up 22% year over year. Larger customers have proven to generate more money for Square, increasing its gross profit by 29% year over year to $783 million in Q3.
Square has proven it can make a lot of money, and as it attracts larger companies, it accomplishes two things: Higher payment volume and more businesses that may not be as susceptible to broader economic conditions. That's a win-win.
Block's Cash App may lead the way
Block became prominent with its Square business, but its growth may rely on its Cash App segment. Cash App is a personal finance app that currently allows users to transfer money, buy stocks and Bitcoin, and get a debit card linked to the app, but it's consistently expanding its offerings. In Q3, Cash App brought in $2.68 billion in revenue with $774 million gross profit, up 12% and 51%, respectively, year over year. Over a three-year compound annual growth rate basis, its revenue and profit are up 106% and 84%, respectively.
Cash App still lags behind Paypal's Venmo when it comes to person-to-person money transfers, but Block is beginning to add commerce capabilities to the app that should bring in more consumers. With its acquisition of buy now, pay later company Afterpay, Block can insert itself into the e-commerce space. Companies benefit from sales, and if the ability to break up payments encourages consumers to spend more, more companies are likely to begin accepting Cash App and Afterpay.
Cash App currently has 47 million monthly active users (up 3 million from the end of 2021), and this trend should continue as more commerce capabilities help drive more customer adoption.
DATA BY YCharts
Trending in opposite directions
As Block CEO Jack Dorsey described it, Block is building an "ecosystem of ecosystems." Both Square and Cash App have ecosystems that are constantly expanding and becoming one-stop shops for businesses and consumers.
Time will tell if Block's large bet on Bitcoin will pay off in the long run (it bought $50 million worth in October 2020 and $170 million worth in early 2021), but even if it doesn't, I don't believe the company has committed enough to it for it to be detrimental. Block's two core businesses, Square and Cash App, still have lots of room for growth in their respective markets.
Block's stock price has traditionally moved with its revenue, but that trend has changed this year because of the broader market downturn. If time is on your side, now may be a good time to either start a stake or begin increasing your stake in the company.
