High inflation has been a serious problem for the better part of the past two years, and its effects have rippled through every level of the economy. Consumers are spending money more cautiously, businesses are scrutinizing budgets more closely, and many investors are selling stocks hand over fist to hedge against a possible recession. Those events have sent the benchmark S&P 500 spiraling into a bear market.
Meanwhile, Block (SQ 1.52%) has seen its share price plunge 75%, marking its sharpest decline as a public company. Yet the underlying business is still healthy. Block is gaining momentum in the Square and Cash App ecosystems, and it remains well positioned to capitalize on a large and growing addressable market. That means the stock could soar on the heels of an economic recovery.
Here's why investors should treat the downturn as a buying opportunity.
NYSE: SQ
Key Data Points
Square is gaining momentum with larger sellers
Through Square, Block provides an integrated suite of hardware, commerce software, and banking services that help sellers manage their businesses across online and offline locations. That includes everything from point-of-sale (POS) systems and payment processing services to marketing software and deposit accounts.
The cohesive nature of the Square ecosystem sets Block apart from most other merchant services providers. For instance, banks often bundle hardware, software, and financial services from multiple vendors, but disparate products can be difficult to integrate, especially for small businesses that lack robust IT support. Square eliminates that complexity, and that strategy has paid off handsomely. Square's gross profit has increased at an annualized rate of 29% over the last three years.
Block outlined two important growth strategies for its Square ecosystem: grow upmarket and expand internationally. And the company is making progress on both fronts. Mid-market sellers (i.e., those with over $500,000 in annual sales) accounted for 40% of gross payment volume (GPV) in the third quarter, up from 37% last year and 31% two years ago. That bodes well for Block for two reasons. First, larger sellers use more software products, which translates into more gross profit for Block. Second, larger sellers exhibit higher retention rates.
Switching to geographic expansion, international sellers accounted for 15% of gross profit in the third quarter, up from 9% last year and 8% two years ago. But Square products and services are only available in nine countries across North America, Japan, Australia, and Europe, and its portfolio is currently limited in many of those geographies, meaning Block has plenty of room to grow internationally.
Image source: Getty Images.
Cash App is becoming a commerce engine
Whereas Square simplifies commerce for sellers, Cash App aims to simplify money management for consumers. It brings together the ability to send, spend, borrow, and invest money on a single platform, and that strategy is resonating with younger generations. The Cash App ranked as the most-downloaded digital wallet in the U.S. in 2022, according to Apptopia, with more downloads than PayPal and Venmo combined.
Not surprisingly, that popularity has translated into impressive financial results. Cash App gross profit has increased at an annualized rate of 84% over the last three years, and monthly active users increased 20% to 49 million in the most recent quarter. Better yet, the number of Cash App Card users -- which generate nearly twice as much gross profit as non-users -- increased more than 40% to 18 million.
Looking ahead, Block plans to transform the Cash App into a commerce engine by integrating shopping capabilities into the digital wallet. Specifically, products from Afterpay and Cash App Pay sellers will populate in the Discover tab on the Cash App, allowing users to browse and buy products on the platform. That could create a powerful network effect: As more consumers become Cash App users, more businesses will likely accept Afterpay and Cash App Pay. And as more businesses bring shopping opportunities to the platform, more consumers will likely become Cash App users.
In a nutshell, building commerce into the Cash App should bring more users to the platform, giving Block an opportunity to monetize those users with adjacent services like the Cash App Card. It should also boost sales for sellers, and it should drive acceptance of Cash App Pay and Afterpay. All of those things are good for Block. But it will also create one more noteworthy revenue stream: Block will be able to monetize the Cash App with digital advertising, much like Amazon targets consumers with sponsored product suggestions on its marketplace.
Block has a massive market opportunity
Block puts its total addressable market at $190 billion in gross profit, which represents $120 billion for Square and $70 billion from Cash App. That figure is up nearly 20% in the last two years, and it should continue to climb as Block introduces new products. For context, Block reported $5.5 billion in gross profit over the past year, meaning the company has hardly scratched the surface of its addressable market. That's why investors should buy this growth stock today.
