Block (SQ +3.77%) stock was a hot tech stock that soared when it first went public. It offers innovative fintech solutions for businesses and individuals, and it seemed to address many needs for merchants services and digital payments.
However, Block has faced some major challenges over the past few years, not least the fact that it's struggling to be profitable. Investors have soured on its stock, and it's down 8% this year, trailing the broader market's gains. Is this an opportunity for investors to buy on the dip, or is this a stock to avoid? Here are views from both sides of the argument.
Bull case: Fintech is growing, and Block is a major player
Block operates several businesses, the largest being its original sellers business under the name Square and the Cash App personal financial services business. It changed its name in 2021 to reflect its growth from its origins as a merchant services business to a diversified business with many blocks working together to create something bigger. It also incorporates the company's focus on Bitcoin and blockchain technology as a tool for economic empowerment.
Revenue has been climbing steadily since a dip in 2021. It increased 26% over last year in the 2023 second quarter, driven by a 36% rise in Cash App revenue. The Cash App business is typically the stronger one. Cash App offers a complete financial services app with digital payments, investing, credit card services, and even bank accounts. Bitcoin sales, which the company records as revenue, increased 34% over last year to $2.4 billion. Without Bitcoin, Cash App revenue was $1.16 billion. The sellers business is still growing in the double digits, increasing 12% over last year.
NYSE: SQ
Key Data Points
Management is cutting costs to become more efficient and reach consistent profitability. It slowed down hiring and is changing course from developing newer projects to investing in proven businesses. It's working on things like integrating artificial intelligence and automation to improve its products and increase adoption, as well as boost its margins.
Block can continue to grow substantially simply with the growth of the digital payments industry. According to Statista, digital transaction volume is expected to grow at a compound annual growth rate of 11.8% through 2027. The market is huge and growing, and as Block gets back to its roots and pivots back to what it does best, it should be able to generate higher growth and profitability.
Bear case: There's too much risk
There are still troubling signs for Block, notably that it's struggling with profitability. Both net income and even operating income have been negative since late 2021, and profitability cratered last year instead of improving. Management is taking concrete steps to address this, but it has yet to yield real results.
SQ Operating Income (Quarterly) data by YCharts
Part of the downturn was certainly due to the change in the company's direction. This all happened around the time it changed names and strategy to encompass riskier strategies like investing in Bitcoin. It's good to see it's getting back to its original mission, and it was the right step for CEO Jack Dorsey to leave Twitter and turn his focus to one company. But investors have lost some confidence in Block's management.
Its reliance on Bitcoin as a major business driver also exposes it to risk. Although the price of Bitcoin is up this year, it's trading for less than half of its highs at the end of 2021. The company's profit trajectory is highly correlated with the ascent and descent of Bitcoin, and buying Block stock is to some degree an investment in Bitcoin.
Might not be the best building block for your portfolio
Block stock is trading for the relatively cheap price of only 1.8 times trailing 12-month sales. But it's cheap for a reason. You can make the case that Block is getting its act together and if you buy now, your money could grow. However, that approach isn't for the faint of heart. Most investors should sit this one out for now, and if the situation changes, reassess.
