Block (SQ 2.32%) shares plunged a day after the release of its second-quarter 2023 numbers on August 3. Although this fintech company, which owns the Square ecosystem and Cash App, posted strong growth numbers and raised its outlook, some indications pointed to slowing growth in third quarter.
Nonetheless, upon a closer examination of all the numbers, the positives appear to outweigh the negatives. With a lower stock price adding an extra incentive, this should give investors all the more reason to add shares of the Square parent.
Losing less money last quarter
To properly assess the latest results, we need to adjust for the fact that Block buys the Bitcoin cryptocurrency for users to trade. This forces the company to treat Bitcoin sales volumes as revenue. For that reason, the gross profit, which subtracts Bitcoin costs, better reflects the true state of Block's revenue.
In Q2, that gross profit was nearly $1.9 billion, a 27% increase versus the same quarter last year. This was thanks mainly to the 37% increase in gross profit for Cash App although the Square ecosystem grew by 18% over the same period.
Still, with operating expenses rising 19%, Block reported an operating loss that resulted in a net loss of $126 million. That represented an improvement from the net loss of $209 million in the same quarter last year. Also, when removing expenses such as share-based compensation, the adjusted basic net income was $246 million, up 125% year over year.
Additionally, Block raised its 2023 adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) forecast to $1.5 billion, and now believes it will report an operating profit during the year.
So why the drop in the stock price?
Still, Block reported some bad, or at least less good, news. On the Q2 2023 earnings call, the July gross profits for Square and Cash App were up 15% and 27%, respectively. While positive, that is a significant reduction from Q2.
Also, management mentioned that existing sellers' gross payment volume (GPV) dropped between the third quarter of 2022 and the second quarter of 2023. The company blamed that on lower consumer spending, revealing that churn levels -- that is, the proportion of customers who stopped using the service --had remained stable.
Such news likely contributed to negligible growth in the stock price for the year. While that still means it has outperformed rival PayPal, its has not risen like many of its tech counterparts.
Some good news in the financials
Nonetheless, one should question whether such news calls for a 14% drop in the stock price, especially when one can find plenty of positives in the details.
For one, markets outside of the U.S. make up 16% of the company's gross profit, up from 15% one year ago. While that is slower growth from 2021, when international gross profit was 8%, the Square segment has not added any countries since it launched the service in Spain in January 2022. Thus, all of the improvements occurred through internal growth.
Moreover, the Cash App ecosystem also continues to grow, with Q2 setting a record for peer-to-peer volume, which reached $53 billion. Also, in June 54 million people made a transaction on Cash App, rising 18% in one year. Hence, even if slowing consumer spending has modestly reduced individual usage, the growth in the Square and Cash App ecosystems should more than compensate for those reductions.
Consider Block stock
Amid the drop in the stock price, investors appear to have an excellent opportunity to add shares of Block. It was not a perfect report. However, the Square and Cash App ecosystems are growing at a rapid pace, and even if growth slows somewhat due to the economy, gross profit for Block should continue to rise at a double-digit rate.
If Block can maintain this pace, the fintech stock could show positive net income on a GAAP basis within a few quarters, increasing the likelihood of a long-awaited recovery in Block's stock price.
