What happened
Shares of financial-technology (fintech) company Block (XYZ 2.23%) got a boost on Friday after the company reported financial results for the fourth quarter of 2022. In the report, management pulled back the curtain on its financial goals over the long term, which Wall Street appreciated. And that's why the stock was up almost 5% as of 2:15 p.m. EST.
So what
For Q4, Block generated revenue of $4.65 billion, which was a 14% year-over-year increase. This number, however, includes revenue that it generates from facilitating transactions of Bitcoin -- a revenue source it doesn't intend to earn a profit from. Therefore, removing Bitcoin from the revenue figure is helpful. And excluding Bitcoin, Block's revenue was up an impressive 33% year over year.
Another caveat is helpful. Block acquired buy-now, pay-later company Afterpay, which boosted revenue inorganically. Excluding the acquisition of Afterpay, Block's revenue was still up 21% year over year, which is impressive considering how much the business grew in 2020 and 2021.
The balance between the Cash App ecosystem and the Square ecosystem for merchants is also worth noticing. In Q4, gross profit for Square was $801 million, up 22% year over year. And gross profit for Cash App was $848 million, up 64% as adoption surges.
Having two powerful businesses like this is a big reason the stock was up on the market's down day today.
Now what
Wall Street was also encouraged by Block's commentary regarding fiscal discipline going forward. Stock-based compensation is a huge expense for many tech companies, including Block as seen in the chart below, that gets excluded from certain profitability metrics.
SQ Stock Based Compensation (Quarterly) data by YCharts.
Going forward, Block's management will be leaning more on the adjusted operating income metric, which includes stock-based compensation. For each of its business segments, management's goal is based on the Rule of 40. The growth rate plus the adjusted operating margin needs to at least equal 40 -- which is a very good metric to shoot for and for creating shareholder value.
For what it's worth, Block fell far short of its Rule of 40 in 2022 -- it hit 23 excluding its Afterpay acquisition. Therefore, it has work to do, and shareholders should take its ambition with a grain of salt. That said, the market is encouraged with the newly articulated focus. And balancing growth with profits would be good for shareholders long term.
