Block (SQ 2.32%) pleased investors when it revealed its financial results for the last three months of 2023. Gross profit surged 22% on a year-over-year basis, with double-digit percentage gains for both Square and Cash App.
The company's forecast was also strong, particularly as it relates to profitability. Executives said they expect Block to post an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin of 29% in the current quarter, which would mark a huge improvement from last year.
This business is picking up steam this year and beyond. Is it time to buy this top fintech stock on the dip?
On the path to bigger profits
In 2019, 2020, and 2021, Block -- then known as Square -- reported positive net income in each of these years. This was a consistently profitable enterprise, which is an attractive quality that all investors should want from the companies that they own.
But heavy investments in growth opportunities, like product development and customer acquisition, have led to losses for Block. Last year, co-founder and Chief Executive Officer Jack Dorsey decided that it was time to scale back and create a more efficient organization. Perhaps he recognized that in an era of higher interest rates, getting financially fit should be a top priority.
In 2023, Block's operating expenses were up 18% year over year, trailing the 25% jump in gross profit. This helped result in net income of $9.8 million for the full year, a welcome surprise.
Dorsey also set a cap of 12,000 employees until growth starts to seriously pick up (which would warrant new hiring). Across the tech landscape, we're seeing a similar focus from executives on getting rid of bloat that accumulated during the past few years.
Powering the financial lives of its users
There's no question that Block makes its users' lives better. This is a true sign that the company actually adds value. When considering what would happen if the business didn't exist, it's clear Block has an economic moat, particularly around switching costs.
Merchants who use Square's wide array of offerings are unlikely to change providers given the headaches it would cause. Innovative features are always a main focus, most recently around ways to integrate artificial intelligence (AI) to improve sellers' ability to manage their businesses.
And the same could be said for Cash App customers, of which there are 56 million monthly active users. As users interact with more features, like the Cash App Card or Bitcoin trading, it could further entrench them in the Cash App ecosystem, making it their primary personal finance tool. Cash App inflows, a key metric for the management team, rose 18% in Q4.
Looking ahead, there is still a lot of growth potential. Combined, the leadership team forecasts a $190 billion gross profit opportunity for Square and Cash App.
Is the valuation compelling?
As of this writing, shares of Block are an eye-watering 73% below their peak price. They've actually underperformed both the S&P 500 and Nasdaq Composite since the start of 2023. This isn't what investors want to see.
The stock currently trades at a price-to-sales ratio of 2.1. That's significantly below its historical average.
But given the prospect of increasing profitability, we can look at the stock using a different valuation method. Shares are selling at a forward price-to-earnings ratio of just 24. That looks like an attractive price tag for a business that has as much potential as Block does.
Of course, investors who are bullish on the company's ability to continue scaling up its gross profit and adding more customers, while at the same time reporting accelerating net income, should buy this stock without hesitation. It could be a huge winner in the long term.
