Investors continue to have doubts about Block (SQ 0.02%) stock, formerly known as Square. Once an up-and-coming high-growth company, it's been losing money and facing competition across its businesses. Block stock is up just 2% during the past year.
Management recognizes that the company may have lost its way and is taking action. Chief Executive Officer Jack Dorsey laid out his plan for leveraging Block's model to differentiate it from the pack and create shareholder value. Let's see where it might be a year from now.
Getting back to its core
Block started off with its seller's business, which provides payment and management solutions for small businesses. It had some innovations that brought it to the attention of investors, such as its square-shaped phone attachment (hence the name) that lets anyone take payments on a smartphone. It grew from there to offer a full range of hardware and software that bring a business's financial activities together in one place with easy-to-use products and services. It also developed a personal financial service called Cash App, which has been incredibly successful as a peer-to-peer payments business. It has since expanded to offer credit cards, bank accounts, and more.
NYSE: SQ
Key Data Points
Block also veered into other businesses, including Tidal, a digital music platform, and TBD, an open platform for blockchain developers. Along that route, it has been a big proponent of blockchain and Bitcoin.
The focus on Bitcoin has had a significant impact on Block's business. It counts Bitcoin trading as revenue, and the value of Bitcoin has trickled straight into Block's financial statements. That's taken the focus away from some of its really excellent and popular products.
New developments in the pipeline
Management is committing to return to its culture of design and innovation. It's focused on developing Cash App further into new spaces. Dorsey said that Block is looking to capture the market of households with earnings of up to $150,000 annually, which make up 80% of consumers and 50% of income. The goals are to "bank its base," serve families, and create the "next generation of social banking." It's looking to convert its 56 million monthly transacting active customers into bank account holders -- right now it only has 2 million bank accounts, and it sees this as a large market opportunity.
In its previous update, management said that it would look to combine Square and Cash App, so this latest update was a pivot. In other words, it doesn't seem like management is so clear on where it wants to go -- and to me at least, these plans sound ambitious and kind of dreamy; not so different from what it's done over the past few years, just a different path. It's hard to say where Block will be in a year from now, partly because this is all new, and partly because it keeps changing direction. It might have a new or updated product bringing the best of its businesses together. Or it might have an extended Cash App. Or both, or something else. But it will probably bring new services to market.
Moving toward profitability
Dorsey pointed out that Block cut its workforce to less than 12,000, forcing it to prioritize and get the most out of its resources. It posted positive net income in the 2023 fourth quarter, but it has posted four straight quarters of operating losses, and gross margin is still below pre-pandemic levels.
There has been improvement, though. The operating loss was smaller in 2023 than in 2022, and it eked out a small net profit in 2023. Gross margin is expanding.
If Block continues to demonstrate progress, investors are likely to reward Block stock with gains. And there's a good chance that can happen over the next year.
Things can change quickly
I do have confidence in management's ability to create useful products that are designed well with the client's needs in mind. I have less confidence in its ability to turn them into viable, profitable businesses without some serious work. In a year from now, you want to see real efforts toward becoming more efficient and moving closer to profit.
If you have an appetite for risk, you might want to take a small position in Block stock. But most people should sit on the sidelines until there's more progress toward the right goals.
