Shares of fintech company Block (SQ 2.32%) soared 22% in December according to data provided by S&P Global Market Intelligence. There wasn't specific news sparking the jump in price, but many stocks benefited from an overall market rally in reaction to the Federal Reserve's announcement that it would cut interest rates this year.
How this benefits Block
Block, formerly Square, is a fintech company that operates what it calls two "ecosystems." Its original seller's business, which it still calls Square, markets small-business solutions, including hardware and software that automates many processes. Its Cash App is a digital personal finance app that offers everything from bank accounts to Bitcoin trading.
Both of these businesses are popular and growing, but the Cash App business is larger and growing faster. Management sees an opportunity in combining them, where it says there is a white space in creating more digital financial tools for small businesses.
Overall, revenue increased 24% year over year in the 2023 third quarter to $5.6 billion, and gross profit increased 21% to $1.9 billion. However, profitability has been pressured for a while, and net loss was $29 million in the third quarter.
Block lost some of its direction when it embraced Bitcoin, not only as a mode of currency, but also as a central part of its mission a few years ago. That was part of its decision to change its name in 2021. Bitcoin has been volatile since then, and investors have lost some confidence in Block. However, co-founder and chief Jack Dorsey said that the company is recommitting to getting back on track and focusing on its core business segments.
There's work to be done
Block stock gained 23% in 2023, on par with the broader market. As inflation eases, both of its segments should benefit. Square gross payment volume increased 11% over last year in the third quarter, and that's likely to accelerate in an improving economy, especially as management seeks to upgrade it. Cash App, which has banking capabilities and is more directly linked to interest rates, should benefit from lower interest rates.
There's plenty of risk as the company tries to find its footing and a clear path forward. But there are many reasons to be excited about Block's prospects this year, and risk-tolerant investors might want to consider buying some stock.
