Some stocks do massive round trips. One of the biggest round-trip stocks in 2021 was Block (SQ -2.11%). If you had spent $250 on Block stock at the beginning of 2020 and held it until today, you would have about $294. If you had sold it at its peak in August 2021, you would have had about $1,118.
Stock price round trips can be expensive. Growth stocks often get overhyped and when that happens it pays to take some exposure off the table before it gets too far down the losing path.
But let's say you held Block for the whole time and are wondering what to do with it now. What's your best option at this point?
Image source: Getty Images.
Block is developing its "ecosystem of ecosystems" in payments
Block was once known as Square, and was known best for its peripheral device that permits businesses to manage credit card transactions using a smartphone or computer tablet. The company changed its name in late 2021 because it wanted to be known for more than just its iconic device.
Block CEO Jack Dorsey refers to the company as an "ecosystem of ecosystems" and it has branched out its services into consumer applications and also cryptocurrencies. Block's offerings include Square, which focuses on business operations like the card reader, and Cash App, which allows individuals to send and receive money as well as execute several other fintech-related actions. The company also owns Tidal, a video service, and TBD, an open-source platform for managing blockchain and Bitcoin-related needs.
Cash App and Square are really the meat of the company, and Block has been working to connect them together more efficiently. Cash App originally started as an email product but recently added a card service, which opens the door to all sorts of other transactions like trading stocks or Bitcoin. At the end of September 2022, the Cash App card had 18 million users. Square is more than just payment processor now; companies contracting its services can do payroll, invoices, and customer relationship management. Companies that run payroll through Square can allow their employees to get their funds via Cash App. Block also acquired "buy now, pay later" company Afterpay in late 2021, which could help integrate Cash App and Square even more.
A pandemic darling comes back to earth
Square stock was once a highflier, and it has since come back to earth. In the first half of 2021, the stock quintupled before giving it all back. Part of the reason for the strong performance was undoubtedly hype over Bitcoin, but also a firehose of liquidity courtesy of the Federal Reserve during the early days of the pandemic.
Block is experiencing robust growth, especially if you strip out the Bitcoin revenue. Block counts Bitcoin revenue and costs on a gross basis, which means it counts the sell side of a Bitcoin transaction as revenue and the purchase side as a cost. This makes revenue look larger and compresses margins. The company generated $327.4 million in earnings before interest, taxes, depreciation, and amortization (EBITDA) in the third quarter of 2022, which was a 40% increase compared to a year ago. On a trailing 12-month basis, the company earned $894 million in EBITDA. This sounds great, although the company has a market capitalization of $43 billion, so earnings need to grow a lot to catch up with the multiple.
Operating leverage is the key
Block's future will depend largely on whether it can increase margins as it grows, which is called operating leverage. The company has spent a lot of money on acquisitions and investors are getting impatient to see further growth on the bottom line as well as the top line. Block's chart correlates pretty closely with Bitcoin's, so investors need a strong stomach to ride out the shifting changes in sentiment for crypto. Block will certainly continue to grow and perhaps its ecosystem of ecosystems will dominate financial transactions going forward. Whether that means the stock goes up from here is anyone's guess.
