Block (SQ 2.32%) recently reported 2023 second-quarter financials, posting a gross profit of $1.9 billion, which was up 27% year over year. The company also produced adjusted diluted earnings per share of $0.39. These were better numbers than what Wall Street analysts were looking for, an encouraging sign.
Despite what appeared to be strong results, as of this writing, the fintech stock remains 77% off its all-time high. And it trades at a price-to-sales ratio of under 2, about a third of the average valuation in Block's public history. That's an attractive entry point for investors.
But besides the stock being cheap, there are other reasons Block can be a long-term winner for your portfolio.
Taking care of customers
A worthwhile investment action that could boost one's portfolio returns is to identify businesses that offer truly superior products and services. I believe that companies that put their customers first can find outsized success. This so-called customer obsession was something Amazon founder Jeff Bezos first popularized.
Block's merchant division, called Square, not only lets small businesses accept card payments, but it also has a range of different software and financial services products, like inventory management, payroll, managing appointments, and loyalty programs. Management recently launched almost 100 new features for the Square ecosystem. And the segment offers various point-of-sale hardware products.
Square customers are finding themselves using more and more products over time. In 2021, 40% of gross profit was derived from sellers using four or more products, up from less than 10% in 2015. This improved penetration helped grow gross profit at an 18% clip in Q2.
Cash App, which caters to individuals, is the top-ranked personal finance app on the Apple App Store. In an easy-to-use interface, consumers can handle all of their basic financial needs, like setting up direct deposit and buying stocks and Bitcoin. Cash App counts 54 million monthly active users, up 15% year over year.
Cash App benefits from network effects because if a user wants to send their friend money through the app, it incentivizes increased sign-ups. Over time, these consumers can find themselves using more of the features, generating greater revenue for Block. This definitely helps explain why the average Cash App customer costs about $10 to acquire, significantly less than the $450 (on average) that typical retail banks must spend.
Looking at Block overall, it's evident the company has become a force to be reckoned with in the world of payments, thanks mainly to its beautifully designed offerings. On the hardware side, seeing a Square point-of-sale product being unwrapped reminds me of opening a new Apple device. And the Cash App is intuitive, just like how the iPhone maker delivers its software.
Looking toward the future
The latest financial results demonstrate the ongoing momentum facing the business. But Block can be a long-term winner because it has ample opportunities to grow. And management sees big potential.
Square will keep expanding its product offerings as it has recently with the Square Credit Card for sellers to earn rewards. The segment is also increasingly generating a higher percentage of its gross payment volume from larger merchants. Bolstering Square's international presence is a focal point. And like many tech-focused companies, artificial intelligence will play a bigger role going forward.
On the Cash App side, it's all about growing the user base, increasing capital in-flows to the platform, and boosting monetization. Moreover, getting more people to sign up for the Cash App Card, a free debit card that had 20 million active customers (as of March 31), will be important.
As Block continues scaling and multiplying its gross profit, shareholders should expect to see consistent net income growth. And that could push the beaten-down stock higher over time.
