Block (SQ 2.32%) helps sellers run and grow their small and medium-sized businesses with its integrated ecosystem of commerce solutions, business software, and banking services. The fintech giant also happens to be at the forefront of digital payments. More recently, it has expanded its reach to help users facilitate investing, trade Bitcoin, and take advantage of buy now, pay later (BNPL) services.
Block's focus on innovation has positioned it to potentially grow into a major player in finance. The company thrived during the worst of the pandemic thanks to the widespread adoption of digital payments. After heightened growth in 2020 and 2021, growth slowed in 2022 and investors panicked. As a result, the stock trades 77% below its all-time high these days despite the business continuing to do well.
Given this dichotomy, investors must now be wondering whether Block stock is a buy, sell, or a hold. Let's take a closer look and see if an answer presents itself.
Block was an early innovator in digital payments
Block disrupted traditional point-of-sale operators when it incorporated as Square back in 2009. The mobile point-of-sale system it offered eliminated bulky hardware and empowered small businesses to accept payments easily using just their smartphones or tablet computers. Square offers small and medium-sized businesses several advantages, including simplicity, mobility, an open ecosystem, data gathering, and analytics.
Image source: Getty Images.
Square eventually expanded its offerings, attempting to disrupt traditional personal finance services through its Cash App. The app (formerly Square Cash) simplified peer-to-peer payments, making it easier for users to send and receive money. More recently, Square changed its name to Block in 2021 not long after it expanded its Cash App services to include the trading of various stocks and of cryptocurrencies like Bitcoin. It also began offering lending services through Cash App Borrow and Afterpay, a BNPL service.
The good and bad of Block's growth story
Block's primary source of income is from subscriptions and services, which includes fees from processing payments and fees from the Cash App, Afterpay, and other software-as-a-service (SaaS) offerings. This revenue tends to be less seasonal than its transaction-based revenue and thus provides more predictable cash flows for Block. Through three quarters of 2023, subscription-based services accounted for $3.5 billion in gross profit for Block with a profit margin of 64%.
Despite its great margins on various services, Block has struggled to grow its bottom line. In 2019, Block's total revenue was $4.7 billion. In the prior 12-month period, revenue totaled $20.8 billion. But a look at Block's diluted earnings per share (EPS) shows it was $0.81 in 2019 while it was a loss of $0.47 over the trailing 12 months as Block struggles to manage ballooning expenses. The fintech recently announced it would reduce its headcount by 10% to further rein in those expenses.
Block is also working to better integrate the Cash App with Square and strengthen synergies between the two. The company wants to create a closed-loop payments system, providing network effects and improving its position in the highly competitive payments industry. In CEO Jack Dorsey's letter to investors for the third quarter, he said:
"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."
Block's position of strength
Looking ahead, what Block has going for it investment-wise is that it is finally seeing some payoff for its marketing efforts to position its Cash App firmly in the minds (and on the smartphones) of 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, respectively, stating they use the app at least once a month or more.
Block stock: Buy, sell, or hold?
Block is an intriguing company that hasn't entirely found its footing. Its top-line growth and business expansion have been incredible, but its expenses have outstripped this growth, and it has to work to improve the bottom line.
The company is moving in the right direction, and earnings have improved in recent quarters. Analysts project the improvements will keep coming and estimate earnings per share of $0.84 in 2024 and $1.85 in 2025.
SQ PS Ratio data by YCharts
Block stock's up-and-down ride has shares trading at a reasonable valuation, priced at around 1.95 times sales and 1.47 times one-year forward sales. The company is improving profitability, and I think it has excellent long-term potential thanks to its positioning among younger generations. I believe the stock is a buy today.
