Many high-flying tech-focused enterprises that benefited tremendously from the coronavirus pandemic have since fallen back to Earth. Block (SQ 2.32%) is a great example. Even more discouraging, shares have lost money in the last five years, which is extremely discouraging.
For investors with a long-term mindset, this performance just means now is a good time to reassess the company's situation in terms of its long-term potential. Should investors buy, sell, or hold this fintech stock?
Block management is focused
Block operates two independent ecosystems that have each been successful on their own. The Square segment specifically targets both brick-and-mortar and online-only merchants, providing them with the various tools necessary to not only accept payments, but to smoothly run their operations. And with Cash App, Block has a smartphone-based leading personal finance offering that caters to individuals, with a focus on increasing convenience and improving the user experience.
Jack Dorsey, co-founder and current CEO, talked about his company's focus is to find ways to strengthen the relationship between Square and Cash App. He outlined multiple opportunities to do this.
The acquisition of buy now, pay later (BNPL) specialist Afterpay in 2022 is one example. Square merchants can accept BNPL payments from individuals who shop at these businesses directly through the Cash App. This is also the case for Square's merchants in an in-person setting.
Another example is Cash App Pay, which allows users to buy goods and services at Square merchants directly with their Cash App balances.
By better integrating Square and Cash App, Block is on its way to developing a closed-loop payment system. And this could lead to superior financial performance in the long run.
Block could benefit from high switching costs and network effects
Before investors even consider adding a stock to their portfolios, they need to figure out if the business has an economic moat that can protect it from the ongoing threat of competition and disruption. Over the long term, these are the types of companies you want to own.
I think Block benefits from two different moat sources. One of them is switching costs. Think about things from the perspective of a merchant. Once they've onboarded onto Square's platform, which includes using the company's point-of-sale hardware, as well as various software and financial services, changing to a different provider in the future seems like an extremely burdensome process, even if the costs are lower.
With each passing year, a greater portion of the segment's gross profit comes from clients that use multiple products. This means Square's customers should be sticky.
The same might be true for Cash App. Once individuals set up direct deposit, for example, or get comfortable with using an app's brokerage services, they have fewer reasons to switch providers.
Cash App could also benefit from network effects. The service allows for friends and family to send money to each other, which might prompt someone to sign up for the app if they aren't already a customer. This helps explain why Cash App has far lower customer acquisition costs than traditional banks.
Block has a beaten-down valuation
The stock market had a fantastic end of the year in 2023, which propelled Block shares to rise 23% for all of last year. However, they currently still sit 76% below their all-time high from mid-2021. Market traders remain pessimistic about the business's prospects. It could be due to slower growth, the competitive landscape, or the lack of profitability.
But one thing is certain. The stock is cheap right now, trading at a price-to-sales ratio of just 1.9, which is about 67% below Block's historical average. This means it's a good time to either be a buyer of the stock or to continue holding if you've been a shareholder.
