Block (SQ -1.68%), the fintech company formerly known as Square, went public on Nov. 19, 2015, at $9 per share. It skyrocketed to an all-time high of $281.81 on Aug. 5, 2021, but it now trades at about $60. Therefore, a modest $3,000 investment in its IPO would have briefly blossomed to $62,624 before shrinking back to about $13,300 today.
That 567% return in seven and a half years still crushes the S&P 500's gain of 91%, but many Block investors probably wish they had sold the stock at its peak in 2021. Let's see why Block's stock soared, why it stumbled, and where it might be headed.
Image source: Block.
A constantly evolving business model
When Block went public, it generated most of its revenue from its Square ecosystem of digital payment services for small to medium-sized businesses. It locked in those merchants with its payment-processing hardware, which challenged traditional point-of-sale (POS) platforms by converting smartphones and tablets into POS systems.
Its Cash App, which was initially launched as Square Cash in 2013, also challenged PayPal in the market for peer-to-peer payments. It subsequently expanded the Cash App's ecosystem with Bitcoin (BTC 0.74%) trades in 2018, free stock trades in 2019, and tax services in 2021. Block also integrated the buy now, pay later (BNPL) platform AfterPay, which it bought in a $29 billion all-stock takeover last January, into its Square and Cash App ecosystems.
All of those moves turned Block into a more diversified fintech company, but its growth became more unpredictable as it increased its exposure to Bitcoin, both through Cash App trades and by accumulating more Bitcoin for its balance sheet, and reduced its gross margin by integrating AfterPay's BNPL services. Its purchase of the the struggling streaming music platform Tidal for $297 million in 2021 further muddied the waters and convinced the bears that Block was "diworsifying" its business by impulsively adding new features and buying more companies.
Taking investors on a wild ride through the pandemic
Between 2015 and 2019, Block's annual revenue grew at an impressive compound annual growth rate (CAGR) of 39%. But in 2020, the pandemic disrupted Block's merchant-facing Square services as brick-and-mortar stores closed down. Yet Bitcoin's price skyrocketed throughout the crisis and easily offset that slowdown.
Block's Bitcoin revenue soared 785% to $4.6 billion in 2020, easily outpacing the growth of Square's seller services, and its total revenue jumped 108% to $9.5 billion. That momentum continued in 2021 when its Bitcoin revenue rose another 119% to $10 billion, and its total revenue grew 86% to $17.7 billion.
Those dizzying growth rates attracted a stampede of bulls during the buying frenzy in hypergrowth and meme stocks in 2021. But many of those investors probably glossed over four major problems:
- Block's growth was mainly driven by Bitcoin's volatile price.
- Rising sales of Bitcoin actually reduced Block's gross margin.
- Rising Bitcoin sales also displaced Square's higher-margin seller revenue.
- Square's seller-oriented businesses weren't resistant to inflation and other macro headwinds.
All of those problems became painfully apparent in 2022 when rising interest rates crushed Bitcoin and inflation curbed consumer spending. Block's purchase of AfterPay also seemed horribly timed, since the same headwinds have reduced the enterprise value of BNPL leader Affirm by 70% since Block closed that deal.
As a result, Block's revenue declined 1% to $17.5 billion in 2022. It also posted a net loss of $541 million, compared with a net profit of $166 million in 2021. Analysts expect its revenue to grow at a slower CAGR of 15% between 2022 and 2025, but they also think it can return to profitability in 2024 as the near-term macro headwinds subside.
Is it a worthwhile investment today?
At its peak, Block's enterprise value reached $127 billion -- or 7 times the revenue it would generate in 2021. Today, it trades at less than 2 times this year's sales. Block stock looks cheap, but its future growth is still heavily dependent on the volatile Bitcoin and BNPL markets. The prolific short-seller Hindenburg Research has also recently targeted it, in a report that claims it inflated Cash App's active user numbers and ignored illegal transactions on the platform. Considering all those challenges, it might be wiser to stick with more stable fintech stocks -- like PayPal or Adyen -- for now.
