Although Block (SQ 2.32%)only went public in 2015 (when it was still called Square), its cube-shaped device that turns smartphones into credit card acceptance machines debuted all the way back in 2009. That makes it one of the market's older fintech names.
That age, however, is also something of a liability. Aggressive growth investors often want something new rather than something proven. That may be why several other, younger fintech stocks have fared better than Block stock has of late. Its shares have dramatically peeled back from their 2021 peak and haven't participated in this year's bullishness at all.
Take a step back and look at the bigger picture though. Operating an established business and at least nearing the point of sustained profits is a bit of a big deal. Block brings such a presence and hope for a solid future to the table, even if the stock's not saying as much right now. Here's why you haven't missed out on Block's growth.
Perception is relative, for better and worse
Initially launched as a simple solution for small businesses that just wanted to accept credit card payments, Block has expanded its offerings far beyond serving as a transaction device. It now offers full-blown point-of-sale equipment and e-commerce support, and it is also developing a variety of cryptocurrency management solutions. Block even owns the popular peer-to-peer cash transfer platform Cash App.
Its core business, however, is still helping small businesses do things they may not otherwise be able to do. Last year, more than half of its top line came from transactions and merchant subscriptions, and the vast majority of its gross profits came from those two arms alone. That gross income was up 36% from 2021's tally, which was up 61% from 2020's figure.
So why is the stock not responding to this seeming success? A handful of reasons.
Chief among these reasons is 2020's jaw-dropping rally, which ushered shares more than 600% above their early 2020 low. While the circumstances at the time clearly favored platforms facilitating contact-free buying and selling, investors got more than a little ahead of themselves. That was also a time when the cryptocurrency craze was still going strong, drawing speculative investors to Block's then-nascent crypto work. The bullish mania couldn't (and didn't) last, of course.
There's also the nagging losses. Although operationally profitable, on a net basis Block has never been consistently profitable. Investors may have been expecting it to get and stay in the black because of the pandemic. Soaring development and administrative expenses in the meantime prevented that from happening.
Lastly, between the entry of competing platforms like PayPal and the age of the payment market itself, investors may be sensing this arena is well saturated, limiting cost-effective future growth.
Sidelined would-be owners of Block stock, however, are missing an opportunity to jump in at a great price by looking past four key points about this company's plausible future.
4 reasons to buy Block stock sooner than later
The stock's gone nowhere but sideways since the middle of last year, with last quarter's numbers up-ending yet another rebound effort.
This lackluster past isn't Block shares' foreseeable future, though. Four tailwinds are working in its favor, and could lift the stock out of its funk and rekindle its long-term rally.
1. The use of cash continues to dwindle: Regardless of how many small business are currently equipped to accept card-based payments, consumers are slowly but surely moving away from the use of cash. The San Francisco Federal Reserve Bank's recent Diary of Consumer Payment Choice indicates that 18% of last year's purchases of goods and services in the U.S. were made with cash. That's down from 2017's figure of 31%, but leaves another 18% of the nation's current cash-based commerce up for grabs.
2. The small business market is still underserved: While Block and rival PayPal have done a great job at serving the small businesses that larger credit card processors seem to mostly ignore, there's plenty more opportunity ahead. The U.S. Small Business Association reports there are over 33 million small businesses in this country alone, plus many, many more overseas that are less likely to be able to accept card-based payments.
3. The peer-to-peer payment market is still in its infancy: Like PayPal, many consumers and businesses may be using Block's Cash App without fully appreciating that many of these transfers generate revenue for the company. Collectively, it generates a lot of it. Of last year's total gross profit of nearly $6 billion, almost half of it came from Cash App. Cash App's gross earnings also grew markedly faster than its commerce solutions business did, up 28% year over year even when excluding its piece of the buy now, pay later loans it helps facilitate.
There's plenty more such growth in the cards, too. Market research outfit Precedence Research predicts the global peer-to-peer payment market will grow an average of more than 20% per year through 2030, jibing with numbers from Acumen Research as well as Straits Research.
4. Cryptocurrency has a future: Last but not least, while it's not a stretch to say cryptocurrency hasn't lived up to the hype from just a couple of years back, it wouldn't be fair to call it a bust either. There's a need for such technology. It's just not meant to be the stuff of speculation.
That's the roundabout way of saying Block is wise to continue working on Bitcoin-based solutions while continuing to support the exchange and usage of Bitcoin. That's true even though its gross profits are nil, and it's still likely an overall net loser for the company.
With that as the backdrop, know that analysts expect this year's top line to be 21% better than last year's, with another 13% growth expected next year. While this still won't likely be enough to produce net profits, at least on a non-GAAP basis it means last year's per-share operating earnings of $1 should reach $1.75 this year en route to $2.45 per share next year.
The uncertainty and volatility are worth it
Although the stage is set for bullishness, that doesn't necessarily mean the stock's ready to begin its rebound journey just yet. Its poor performance for the past couple of years now is leading to a lot of investor doubt, and the economic backdrop isn't helping either. It might take a strong nudge from the market to get it going, and even then, don't be surprised to see a wobbly start.
Block's arguably worth the frustration between now and the beginning of its next sustained gain, though. It's in the right place at the right time, and it still has impressive revenue growth to show for it.
Just keep it in perspective. Block is an aggressive, fairly risky pick and shouldn't serve as a core holding for your long-term portfolio. It's just an interesting add-on.
