It's safe to say that shareholders of Block (SQ 3.19%) are wishing for better days. The stock is down 80% from its all-time high from August 2021. And just this year, shares have dropped 11%, a poor showing as the overall market has risen double digits.
The popular fintech stock is also down 24% since executives revealed second-quarter financial results on Aug. 3. This is odd given that Block beat Wall Street analyst estimates for revenue and adjusted earnings, while also raising its full-year forecast.
What should investors do? To help answer that pressing question, let's consider one reason to buy the stock, as well as one reason to stay away.
Reason to buy: Strong product portfolio
At a high level, Block operates two thriving ecosystems that each serve different customer groups. And investors should consider buying shares because of just how popular its offerings are.
Square is the segment that focuses solely on merchants, providing a wide range of software, hardware, and financial services that help entrepreneurs not only accept card payments, but also handle various functions like invoicing, loyalty programs, and employee payroll. Square generated gross profit of $888 million in the three-month period that ended June 30, which was up 18% year over year.
The Cash App is Block's consumer-facing personal finance tool, allowing individuals to set up direct deposit, send money to friends, and buy stocks and Bitcoin. The service had 54 million monthly transacting users in June. And Cash App's gross profit increased 37% to $968 million in Q2.
Each of these segments would be successful businesses on their own, but they benefit Block overall by being under one roof. During the pandemic, Cash App boomed thanks to stimulus checks hitting accounts, as well as the strength of Bitcoin and the stock market. This encouraged greater activity from individuals, leading to more gross profit for the company.
On the other hand, because many of Square's merchants are small brick-and-mortar businesses, they were hit hard by the pandemic. As a result, Square's growth slowed. But by having Cash App to pick up the slack, Block remained on solid footing.
NYSE: SQ
Key Data Points
Reason to sell: Increased focus on Bitcoin
Founder and Chief Executive Officer Jack Dorsey previously publicly discussed his heightened interest in Bitcoin. "I don't think there is anything more important in my lifetime to work on," he said more than two years ago in June 2021. Cash App has allowed its users to buy and sell Bitcoin for years, but because Bitcoin remains well off its peak price, gross profit generated from essentially being a brokerage service has been under pressure.
Nonetheless, Dorsey is focused on finding ways to boost adoption of Bitcoin. In fact, Block has lesser-known segments, like Spiral and TBD, whose overarching goals are to fund and promote projects that make it easier to use and access the world's most valuable cryptocurrency. Investors might consider avoiding the stock because of so much of Dorsey's attention going to Bitcoin.
This priority could lead to major changes in Block's strategic direction that are hard for shareholders and analysts to predict. As I noted above, Square and Cash App appear to be fantastic segments that are critical for their respective user bases. But what if Dorsey aggressively pushes Bitcoin to its merchant and individual customers? This could alienate some of them who leave to competing service providers.
Moreover, depending on the direction crypto regulation goes, Block could be exposing itself to unknown legislative changes as it relates to its Bitcoin services. And this could hurt the company's financial performance.
Believing in Dorsey
Investors certainly have a lot to think about. I'm in the camp that believes in Dorsey, particularly because I'm also bullish on Bitcoin over the long term. Plus, it's hard to argue with the current price-to-sales multiple of 1.7, which is near the cheapest that shares have ever traded.
