Block (SQ 2.32%) stock has taken investors on a turbulent ride, but one number from its recent earnings report stands out: $1.18 billion. This represents how much gross profit Block has made from its subscriptions and services, which have become increasingly crucial to Block's business.
This revenue is critical for Block's long-term growth because of its reliability and wide margins. Here's what prospective investors need to know before buying the stock.
Block has expanded beyond its initial Square platform
Block's subscription and services revenue grew 33% in the second quarter and was pivotal to the company's 26% revenue growth. This revenue has become an important part of Block's growth over the past several years, so let's dive into what it is exactly and why it is key to its long-term growth.
When Block started out (it previously was called Square), it offered point-of-sales systems that could help small and midsized businesses easily accept credit card payments using phones or tablets. It charges a transaction fee based on a percentage of total sales. In 2017, transactions were Block's primary business, accounting for 82% of its gross profit. Subscriptions and services, which at the time came from instant deposits through the Cash App, its food ordering technology, and Square Capital, were 21% of its gross profit.
The staggering growth of Block's subscriptions and services
Today, Block's subscription and services-based revenue include the processing and partnership fees for Cash App, Square Loans, fees from its buy now, pay later platform Afterpay, the music streaming service Tidal, and other software-as-a-service offerings from Square.
Block prefers this revenue because it tends to be less seasonal than transaction revenue and can be a more predictable stream of cash flows. Also, its gross profit as a percent of total revenue is significantly higher for subscriptions and services, at 81%, compared to 41% for its transactional business.
From 2017 through 2022, Block's gross profit (excluding technology amortization) had grown 598%. Meanwhile, its subscription and services gross profit increased by 1,986%, making up nearly 63% of its gross profit. Strong growth of its subscriptions and services business continued in the second quarter when gross profit increased 134% over the same quarter last year.
Data source: Block. Chart by author.
The fintech's revenue has failed to keep pace with growing expenses
Block's top-line growth is undeniable. Since 2017, it revenue has increased by 691% due to its expanding subscriptions and services, transaction revenue from its Square offering, and Bitcoin revenue.
The company posted its first profit on a generally accepted accounting principles (GAAP) basis in 2019 when its net income was $375 million. However, ballooning expenses since then have dragged down its earnings, and the fintech reported a net loss of $541 million last year.
Rising costs result from Block's aggressive expansion efforts and growing share-based compensation, which topped $1 billion last year. As a result, shareholders have had a volatile ride, with the stock reaching as high as $289 per share before falling to about $54 per share today.
An intriguing stock at a low valuation
Block has struggled to turn a profit since 2019, making it a riskier stock for shareholders. If you are a conservative investor looking for steadier returns, you probably want to avoid this fintech for now.
Data source: YCharts
However, if you are willing to hold through future volatility, Block could be the stock for you. The growth of its subscriptions and services revenue is good because these cash flows are more predictable with wider margins. Also, the stock price reflects the lackluster bottom-line growth, pricing the company at 1.64 times sales -- providing a potentially attractive entry point for risk-tolerant investors willing to hold it for the long haul.
