With the help of its innovative focus and its disruptive potential for both consumers and merchants, Block (SQ 2.32%) managed to keep itself at the forefront of the digital payments revolution for years now.
But there could be even bigger things in store. Jack Dorsey, Block's co-founder and CEO, apparently has his sights set on an ambitious new goal.
Read on to find out what that new goal involves and whether it makes this fintech stock a screaming buy.
Block is developing some closed-loop ambitions
Block got its start back in 2009 as a company called Square that focused on providing a credit-card payments platform for small and medium-sized businesses using smartphones and tablet computers as the point-of-sale "cash registers." Square soon expanded into offering multiple business operations support (e-commerce, inventory, scheduling, banking, business loans, etc.) to merchants. Eventually, the company evolved into Block after adding services like the Cash app, which provided numerous services for consumers (including peer-to-peer transactions, direct deposits, banking functions, tax filing, stock transactions, etc.). Block now operates more as a conglomerate of numerous business and consumer services across a wide spectrum, and not all the services are necessarily connected.
Block management is working to change that.
"We finally have line of sight to seeing more of Square within Cash App, and vice versa," Dorsey wrote in the Q3 2023 shareholder letter released last month. "We believe combining the two ecosystems enables us to provide consumer experiences others can't, specifically for commerce."
The two segments are integrated with Cash App Pay, which allows consumers to pay directly at Square merchants with their Cash App balances. And Block's "buy now, pay later" service Afterpay provides a way to connect shoppers with merchants using a popular funding option. The goal of the integration is to bring a lot more merchants to the ecosystem, adding utility value for Cash App users.
Looking at the connections being made, it would seem that management's end goal is to one day create a closed-loop payments system. In Block's case, anytime a Cash App Card customer uses their debit card at a Square merchant, the business receives all the various fees associated with the transaction (except for the tiny assessment fee that Visa makes from the Cash App Card, which is a Visa-branded card).
A closed loop would be beneficial financially for Block, especially if adoption continues to grow. It could also create powerful network effects that bolster Block's competitive position. This setup is similar to those of American Express and Discover Financial Services. Both of those companies serve as the "financial partner" backing their credit cards' transactions and collect fees as well as interest expenses when users carry a credit balance.
Of course, not everyone wants or needs a Cash App debit card. In fact, there are much more popular options offered by major banks, as well as the aforementioned American Express. And it's unlikely Square merchants will only accept Cash App Pay for all transactions. It's still a strategy that is probably on Dorsey's mind and something investors might want to make note of.
Still a smart buy
Even without the potential for a complete closed-loop system, this added integration of its various services still makes for another reason to consider Block a smart investment opportunity. There are three compelling reasons why.
First, it's hard to argue with Block's customer value proposition. Merchants don't have to try and piece together various services from multiple providers. They can become Square customers and focus their attention on running their businesses with seamless software and hardware solutions. For individual consumers, Cash App is an easy-to-use personal finance tool. In some cases, it could be a complete substitute for an account at a traditional bank. Services it offers even include the ability to buy and sell Bitcoin.
Second, Block is a business in full-on growth mode. Despite macro headwinds, its overall gross profit rose 21% year over year in the most recent quarter, with double-digit gains reported for both Square and Cash App. Management's long-term growth playbook consists of doing what it has always done, which is to add new features and find ways to drive user gains and payment volume while also entering new markets. Block management estimates the addressable market size is $70 billion for Cash App (from a gross profit perspective) and $120 billion for Square. There is a ton of runway here.
Lastly, we can't ignore Block's current valuation. Shares are currently trading 76% below their peak price, and they aren't expensive by most metrics. The stock sells at a price-to-sales multiple of 2, well below the historical average of 6.
