It's been rough for Block (SQ 2.32%), the financial technology company formerly known as Square. After gaining confidence from investors, who envisioned Square as the payment company of the future, Block took a few wrong turns, and its stock is down 75% from its highs in 2021.
The good news is that management is recognizing the need for change, and it's responding. Block continues to report strong growth, and now it's working to improve profitability and double down on the core activities that originally led to its success. It recently updated investors about important trends that are working in its favor right now, and that could lead to an incredible 2024.
What customers want
Block operates two businesses: the seller business called Square and a personal finance services app called Cash App. Square offers various small-business solutions such as payment processing and inventory and hardware like connected payment terminals and point-of-sale devices. It streamlines varied tools together in one place for a simple management system.
A business can only succeed if it's offering what customers want. Block went astray from that over the past few years when it jumped on the blockchain bandwagon and began to move into several services that reenvisioned what the company stood for. But management now says it's committed to offering new services that add real value to client businesses.
It recently published the results of its annual "Future of Commerce" survey that it performed with Wakefield Research, reaching out to 2,000 retail owners and managers and 2,000 restaurant owners and managers in the U.S., Canada, the U.K., and Australia. They also reached out to 4,000 consumers. The results aren't surprising, but they reinforce the idea that Block has a lot to offer to its "seller" clients, businesses.
Most significantly, 100% of restaurants in the survey said they planned to expand in 2024. They're also looking to deliver what customers want by leveraging more data and offering rewards. This is Block's sweet spot, and this is a tailwind for Block.
All of the survey's retail and restaurant respondents said that automation and technology have improved their businesses, including by improving customer experience and boosting staff retention. Sixty-seven percent of retail businesses and 76% of restaurants said that they wanted to have some automation for repetitive tasks. Square's solutions offer many AI-based automation tools for tasks such as staff scheduling and payroll services. Ninety-nine percent of retailers said they planned to offer new revenue streams this year, while 77% of restaurants said they want to offer non-core products like meal kits and merchandise. Square has software developed exclusively for the restaurant industry that has built-in capabilities to easily add additional products straight into a business's website.
These survey findings affect Block because its seller segment has excellent customization for clients to easily move in these directions. Block faces stiff competition from other platforms like Shopify, but these tools help it stand out and offer something different for customers.
How is Block doing?
In the third quarter of 2023, revenue increased 24% year over year. Without Bitcoin trading, it was up 16%. Gross profit increased 21% over last year, but is still well below pre-pandemic levels.
Block has reported seven straight quarters of operating and net losses.
CEO Jack Dorsey said that the company sees a way forward by combining its two businesses, the Square seller business and the Cash App. It has always separated these into two "ecosystems," and it plans to turn them into one seamless business, offering customers of each one access to more services interconnected with the other. He envisions that kind of business appealing to a broader assortment of clients who need a customizable solution that takes the best tools overall to work together. He imagines a platform that offers banking, artificial intelligence (AI), commerce, and more.
Don't take Block's word for it
Since this was a company-sponsored research project, the results should be taken with a grain of salt. That doesn't mean to discount them, but to recognize the bias. Even without this input, though, these are trends that are likely to be going on everywhere; companies are looking for better technology and AI. It's not hard to see how that's true across the board.
More important than the customer-related outcomes here is that Block itself sees its customers' needs and is planning to respond accordingly. For investors, that's the key point of this kind of study. Block has millions of satisfied customers and a robust, tech-heavy platform. It's well-positioned to benefit from these trends, as long as it returns to its innovative spirit within the confines of how to improve its platform instead of veering into other activities.
It's lost some trust from shareholders, which is why there's some risk. It's still a top holding of Cathie Wood's Ark Invest, which invests predominantly in tech disruptors. Investors who have an appetite for risk could consider adding shares, and 2024 might be a turnaround year for Block stock.
