It's been a disappointing year so far for Block Inc. (SQ 0.79%). The year started with a mini-rally in January and February, but a controversial short-selling report from Hindenburg Research in March has weighed heavily on Block's fortunes. Heading into May, Block is basically back at square one. The stock started the year trading at $62.84 and currently trades at $60.79.
But Block now has a new plan to turn things around and woo back investors, and it involves Bitcoin (BTC +0.71%) mining. Yes, that's right, the company that is best known for its Square payments technology and the Cash App is now diversifying into Bitcoin mining. Given Bitcoin's epic rally this year (up about 70% year to date), there's certainly reason to be optimistic. So let's take a closer look.
Why Bitcoin mining?
At first glance, diversification into Bitcoin mining would not seem to offer any synergies with Block's existing product offerings. But dig a bit deeper, and the strategy actually starts to make more sense. For one, Block already holds a tremendous amount of Bitcoin on its balance sheet. According to CoinGecko, Block now holds nearly $230 million worth of Bitcoin, which ranks fourth among all publicly traded companies. To put that into context, Block holds almost as much Bitcoin as cryptocurrency exchange Coinbase Global.
Secondly, the company's Cash App offers users the opportunity to buy, sell, send, or receive Bitcoin. While the bearish Hindenburg Research report questioned how many people were actually doing this, as well as the potentially nefarious uses for this app, it's easy to see that Block is no stranger to Bitcoin and crypto payments. With Bitcoin becoming more and more mainstream, it makes sense that Cash App stands to benefit from the current Bitcoin rally.
Block's Bitcoin mining strategy
It's important to note that Block only plans to manufacture the chips and related hardware for Bitcoin mining -- it does not plan to do the actual mining itself. While Block has been involved in a few high-profile Bitcoin mining projects, the ultimate goal is to become an Intel (INTC +12.91%) for Bitcoin mining chips. Block has plenty of experience designing chips for its Square payment processing solutions and says it has revolutionary new technology on deck that will soon be ready for custom-made Bitcoin chips.
Image source: Getty Images.
To jump-start its Bitcoin mining strategy, Block recently bought a huge supply of Bitcoin mining chips from (who else?) Intel, which is winding down its operations. Intel plans to discontinue its Bitcoin mining chip operations by April 2024, and Block is more than happy to fill the void. Block plans to offer its own high-end Bitcoin mining chips and mining hardware by early next year. In doing so, it will go head-to-head with a handful of companies that dominate the space.
Pros and cons
Will the potential synergies actually materialize? If you're an optimist, then you believe that Block can somehow integrate the new Bitcoin mining operations into its other core operations. Theoretically, the more that Block can do to boost Bitcoin adoption, the better it is for its stock price. In short, the logic goes something like this: Rising Bitcoin prices lead to rising fortunes for Bitcoin miners, who will be more likely to buy Bitcoin mining chips from Block. At the same time, rising Bitcoin prices will pump up the value of Bitcoin on Block's balance sheet and convince more people to use the Cash App for Bitcoin. This, too, should boost the overall value of Block stock.
NYSE: SQ
Key Data Points
If you're a pessimist, however, it's easy to see how things could go very wrong. Bitcoin mining is a cyclical business, and there's a good reason why Intel is getting out of the business of manufacturing Bitcoin chips. In good times, it's a good business to be in. But in bad times, not so much. So, if you believe in Bitcoin mining for Block, then you also have to believe that Block is smarter than Intel right now.
Should you buy Block stock?
Right now, there are too many questions swirling around Block to make it a buy. In my opinion, Block still hasn't fully addressed all of the questions in the controversial Hindenburg Research report. And, from my perspective, the claim that Block is going to somehow "disrupt" Bitcoin mining sounds a bit too hyperbolic. The fact that Intel got into and then out of the Bitcoin mining business in just 12 months should be a red flag for investors.
For that reason, I can not recommend Block as a buy right now. While I'm super-bullish on Bitcoin for the long term, I just don't think Bitcoin mining is the right strategy for Block right now.
