Block (SQ 2.32%) shares have been on an absolute tear in the past couple of weeks, up about 40% since the business announced its third-quarter results. Revenue of $5.6 billion and adjusted earnings per share of $0.55 both crushed Wall Street estimates, so, unsurprisingly, investors were immediately optimistic.
But if we zoom out, the picture isn't as rosy. As of this writing, Block shares are down about 80% from their August 2021 peak, and they've declined 8% this year, not participating at all in the broader market's rally in 2023.
Should investors buy this popular fintech stock right now while it's down? Let's take a closer look at Block.
Strength across both major ecosystems
Square, the segment that focuses exclusively on merchants, saw gross profit jump 15% year over year to $899 million in the third quarter. Investors should be ecstatic that this division's innovation engine continues humming along. That's because Square has introduced some new features that can better address the needs of clients.
For example, Square for Franchises was just launched to help handle the complex needs of multiunit sellers. Management noted that franchises in the U.S. generate $860 billion of revenue annually. This move expands Square's addressable market.
Additionally, the leadership team introduced new artificial intelligence (AI) features in October to automate processes for its merchant base. One such tool is the Menu Generator, which restaurants can use to quickly upload their menus to the platform.
On the Cash App side, which is Block's consumer-facing personal finance mobile app, growth was more robust. Gross profit soared 27% to $984 million in Q3. Cash App now has 55 million monthly active customers.
A key product within this segment is the Cash App Card, which is a Visa debit card issued by Block. It has 22 million monthly active users. Management sees the card as a gateway for consumers to use other financial services products.
The goal is for Cash App to replace a traditional bank account for many individuals out there. Through the app, they can set up direct deposit, send or receive money, buy stocks, and take out a short-term loan.
Dorsey's focus
Deviating from past shareholder letters, Block's Chief Executive Officer and co-founder, Jack Dorsey, started the Q3 2023 letter with some important words for his company's shareholders. In it, he mentioned how Block is redirecting its focus toward things that can drive significant value for customers and shareholders over the long term.
Dorsey talked about how, by 2026, the business hopes to achieve the "rule of 40." This means that the gross profit growth rate plus the adjusted operating margin should exceed 40% each year. Block also announced a $1 billion share repurchase program.
In an effort to drive greater efficiencies across the board, Dorsey says the business will maintain a hard limit of 12,000 employees until faster growth is achieved. Although Block has four ecosystems under its umbrella (Cash App, Square, TBD, and Tidal), resources will become more centralized and shared among these groups to eliminate redundancies and wasteful activities.
Dorsey wants his teams to continuously find ways of strengthening the connection between Cash App and Square to develop powerful network effects. And maybe most exciting, he mentioned that boosting engineering productivity throughout the organization is a priority. As part of this push, Block is building generative AI tools for its customers.
I think shareholders should be encouraged by these words from the CEO. They indicate a renewed sense of urgency and focus that can catapult Block to new heights. Of course, it's important to keep tabs on progress in all of these areas, but it's easy to be optimistic.
With the stock significantly below its peak price, investors should seriously consider adding Block to their portfolio right now with the intention of holding for the long term.
