The financial results for Block (SQ 2.32%) in the fourth quarter last year crushed analyst estimates. As of this writing, the shares have surged 18% since the announcement after the market closed on Feb. 22.
The payments and financial services enterprise is seeing strong momentum throughout its business. However, the fintech stock is currently 72% below its peak price, which was set in August 2021.
Is it time to buy Block shares hand over fist? Let's take a closer look at the company.
Two thriving ecosystems
Block operates two key business segments, which are both growing at a healthy clip. Square focuses on merchants, offering a wide range of software and hardware solutions to accept payments and operate their businesses smoothly. Cash App, on the other hand, is a personal finance app that has lots of features, like a debit card, peer-to-peer payments, direct deposit, and a brokerage service.
Square raked in $828 million in gross profit last quarter, up 18% year over year. It's great to see that innovation still drives strategy, with management prioritizing what sellers need. Square is seeing success from a new Pay-as-You-Go model for its hardware, and it introduced a Restaurant Essentials Bundle. These offerings help boost adoption by providing favorable pricing that merchants find compelling.
Cash App generated $1.2 billion of gross profit in Q4. That was up 25% versus the year-ago period. The service had 56 million monthly active users in December. Cash App recently launched free overdraft protection and a new savings product.
The Cash App Visa debit card is finding success, now with 23 million monthly active users. That figure was up 20% year over year. Executives closely monitor the success of this product. "We see the Cash App Card as a gateway to our customers adopting Cash App as a primary banking solution," founder and Chief Executive Officer Jack Dorsey wrote in the Q4 2023 shareholder letter.
It's encouraging to see Block post solid growth amid macroeconomic uncertainty. Customers are finding a lot of value in Square and Cash App's offering.
Looking ahead, management expects gross profit to rise 17% (at the midpoint of its forecast) in the current quarter, continuing the trend of double-digit gains. For the full year, the forecast calls for gross profit growth of at least 15%.
New priorities
By 2026, Dorsey and his team are aiming to achieve the so-called "rule of 40." This means that the growth rate for gross profit and the adjusted operating income margin combined equal 40.
To get there, Block is focused on finding ways to better integrate its two ecosystems to create a more powerful platform. There were a few strategies laid out, one way being to integrate Afterpay, the buy now, pay later (BNPL) specialist acquired in 2021, fully into Cash App. Additionally, Afterpay could power BNPL activity directly via the Cash App Card.
Creating a more efficient organization is also key. Like many tech enterprises, Block's expenses got out of hand during the pandemic days, when growth was through the roof. Nowadays, it's smart to figure out how to right-size operations to produce profitable growth.
Laying off 10% of the workforce was a major part of getting costs under control. Now with fewer than 12,000 employees, a cap set by Dorsey, executives will "continue to look critically at our organization and priorities." Perhaps this is the beginning of a consistently profitable business.
What about the valuation?
Block shares haven't been too kind to investors in recent years. The stock is down 3% in the past five years, while the S&P 500 has soared 81%.
This has resulted in a favorable setup for prospective investors. Shares trade at a forward price-to-earnings ratio of 27, a figure that will look better over time should earnings rise in the years ahead.
On a forward price-to-sales basis, the stock sells at a multiple of about 2. These metrics showcase why now is a good time to add Block to your portfolio.
