Block (SQ 2.32%) recently reported revenue and earnings that smashed Wall Street forecasts, and the stock has climbed about 30% since that financial update.
However, this payments business is well off its peak stock price, which it reached in 2021. The latest financial data signals strong momentum, so some investors might look at the stock as a potential buying opportunity right now.
If you're seriously thinking about buying shares in this fintech company today, take the time to know these three things first. They will help to round out your knowledge.
Two ecosystems
There are two key ecosystems that underpin this company. Block was founded on its merchant solutions, like point-of-sale systems, working capital loans, and invoicing services. This segment is called Square, and it generated 47% of overall gross profit in the third quarter.
Square has found tremendous success by targeting smaller merchants that are otherwise ignored by larger payments providers. The business provides a simple and comprehensive solution that focuses on ease of use above all else. Square handled $55.7 billion in gross payment volume in the most recent quarter, up 11% year over year.
The other major segment is Cash App, a personal financial mobile application that allows individuals to handle basic banking needs, like sending money, setting up direct deposit, buying stocks, and signing up for debit cards. Cash App currently has 55 million monthly active customers
Compared to a traditional bank, Cash App is able to acquire customers at much lower costs. This is probably partly because of the network effects that are present. A Cash App user might want to send money to a friend who isn't already a customer, prompting that person to sign up. This division's gross profit rose 27% in Q3, faster than the Square segment.
Focus on Bitcoin
Cash App users can also buy Bitcoin on the platform. To be clear, this is the only cryptocurrency that these customers can buy and sell. That's because Jack Dorsey, Block's co-founder and chief executive officer, is extremely bullish on the future of the world's most valuable digital asset. "I don't think there's anything more important in my lifetime to work on," he said in an interview in 2021.
Some investors might view this as a complete distraction, drawing attention away from trying to provide essential financial and payment solutions to individuals and merchants. But Dorsey views Bitcoin as a tool for economic empowerment, so it's unlikely that it will decline in importance as a strategic focus.
Block is seeing the financial benefits of Bitcoin's impressive run in 2023. Cash App's Bitcoin-related gross profit jumped 22% in the third quarter.
Closing the loop
At the beginning of the Q3 2023 shareholder letter, Dorsey talked about how his aim is to strengthen the connection between Square and Cash App. "We believe combining the two ecosystems enables us to provide consumer experiences others can't, specifically for commerce," he wrote. "You'll be able to see this for yourself early next year."
I believe this clearly points to the future direction of the overall business. The end goal might be to create a closed-loop payments system, akin to those operated by Discover or American Express. The benefit for Block is that anytime a transaction occurs between one of its merchants through Square and one of its consumer accounts through Cash App, it can keep the lion's share of the transaction fees. And by continuing to add on adjacent services, these customers should be sticky and less likely to use rival offerings.
Understanding these three things about Block can better inform investing decisions about the stock.
