Block (SQ 2.32%) is one of the top companies at the forefront of the digital payment revolution. The company thrived during the pandemic as the adoption of digital payments accelerated. However, the company carried a lofty valuation, profitability in recent years has suffered, and the stock price has plunged as a result.
Today, Block stock is up 73% from its recent low but remains 77% below its all-time high from 2021. The company is growing nicely, and Cash App is carving out a spot as one of the top financial apps among investors. Here are four things to consider if you buy Block stock today.
1. Square and Cash App are the two engines behind Block's growing payments biz
In the early days, Block's primary source of income came from its point-of-sales system, Square, which allows small and medium-sized businesses to accept credit or debit card payments easily using phones or tablets. In return, it earns transaction fees based on a percentage of total sales.
In 2013, it introduced Cash App (formerly Square Cash), which simplified peer-to-peer payments, allowing users to create accounts to send and receive money. It has since built on this app, providing users with banking and investment services.
Block's primary source of income is from subscriptions and services, which include processing and partnership fees from the Cash App, fees from its buy now, pay later platform, Afterpay, and other software-as-a-service offerings. This year, Cash App accounted for $2.8 billion, or 53%, of Block's total gross profits. Meanwhile, Square accounted for $2.6 billion, or 47%, of its gross profit.
Both segments are growing nicely. Through the first nine months of 2023, Square's gross profit has increased by 16%, while Cash App's gross profits are an excellent 37%. Cash App's solid growth can be attributed to the 11% growth in active users and a 21% growth in inflows from the prior year.
2. Cash App is one of the most popular investment apps among younger generations
What makes Block a compelling investment opportunity is the growth of its Cash App and its branding among younger generations. According to The Motley Fool's Generational Investing Tools survey, Cash App is the most-used investing app across all generations, with 38% of respondents saying they use it. Usage is highest among millennials and Gen Z, with 54% and 50% of respondents saying they use the app at least once a month or more.
Image source: Getty Images.
The growing popularity of Cash App, especially among younger users, is a great sign for the company. Millennials and Gen Z are becoming an increasingly larger share of consumer purchasing power and investors, providing Block with an excellent long-term growth opportunity -- as long as it can retain its market share.
3. Integration of apps could boost the strength of its platform
One area to pay attention to with Block is how it integrates the Cash App with Square as it looks to strengthen the synergies between the two. In its shareholder letter to investors from the third quarter, Jack Dorsey told investors:
Over the past few months we've reset the relationship between Square and Cash App and restructured Afterpay to ensure a stronger connection between each, and most importantly, create an innovative customer experience. We finally have line of sight to seeing more of Square within Cash App, and vice versa.
It will be interesting to see how Block further integrates its multiple products. Customers can already use Cash App to pay at Square merchants, and Block makes it easy for customers to split up their payments using Afterpay, its buy now, pay later platform acquired in 2021.
The company may try to create a closed-loop payments system, which could provide network effects and improve its position in the highly competitive payments industry. Investors will find out more details about Block's plan for integration in early 2024.
4. Valuation is reasonable compared to recent history
Block has done a solid job of growing its customer base and revenue. Over the past 12 months, the company's revenue is $20.8 billion. However, it still has work to do to improve its bottom line, as the company lost $282 million over the same period.
One positive sign is its third-quarter earnings, where its gross profits improved year-over-year, and non-GAAP (adjusted) income jumped 31%. Despite this, Block continues to trade at a dirt-cheap valuation relative to recent history. Its price-to-sales ratio of 2 is on the low end of its valuation since going public in 2015.
SQ P/S Ratio data by YCharts
Block stock has been quite volatile over the past few years, remains well below its all-time high, and still has work to do to improve profitability. With that said, the stock is relatively cheap, and it's achieving solid growth from its Square and Cash App offerings -- making it look like a good stock to buy a little today and add to over time.
