Have you sent someone money through an app recently? Or paid for a purchase with a touchless credit card transaction? You might not have used the services of Block (SQ 2.32%), but if you engage in any digital financial transactions, you're benefiting from an upgraded experience that Block has contributed to in multiple ways.
Its original product, the Square card reader from which it took its previous name, was a revolutionary way for small businesses to accept credit card payments at the time, and these kinds of payment options are so widespread today that it's hard to remember a time when they didn't exist.
But for all of its innovations and contributions, Block's business hasn't quite kept up. After wowing investors, who ran up its share price, the stock has lost a lot of its value. Let's see why, where the company is going, and whether Block stock is a buy, sell, or hold right now.
Buy: Popular products and lots of opportunity
Block has two main businesses plus a few smaller ones. It has its original sellers business offering a large array of small business solutions including software and payment processing, an all-in-one or pay-by-service business that's similar to e-commerce platform Shopify. These are popular products that solve pain points for small business owners, such as streamlining accounting tools and easy-to-use hardware, like point-of-sale devices.
The sellers business, Square, continues to generate robust sales growth. Revenue increased 12% to $1.8 billion, and gross profit increased 18% to $828 million in the 2023 fourth quarter. Like many of its competitors, much of its revenue comes from fees from transactions. Transaction-based revenue was $1.49 billion in the fourth quarter.
Square has gained customers and increased sales through a variety of marketing and product advancements, such as offering free hardware to new customers along with higher fees. That removes some of the difficulties in getting new customers to sign on.
It's offering more flat-rate products, which is more transparent for customers, and the newer banking products create a fuller platform for customers who want a system with many services.
Block's other main business is Cash App, a personal financial app with a large array of services in one place. Cash App revenue increased 31% year over year in the 2023 fourth quarter, and gross profit was up 25%.
It has expanded to include bank accounts, investing tools, and other services in addition to the original peer-to-peer digital payments service. It's attracting customers with a high-rate savings account and overdraft coverage, and more customers are signing up for direct deposit, which indicates stickiness and future revenue generation.
Image source: Block.
By expanding its services, Block is reaching new customers and widening its market opportunity. It says that what was a $160 billion opportunity in 2020 is now more than $200 billion, of which only 5% is being exploited. Most of its active transacting customers are millennials or Gen Zers, who are young and will grow along with Block.
There's plenty of potential for Block to upgrade its business and attract new customers as financial services increasingly go digital.
Sell: Low profitability and a weak way forward
As amazing as the opportunity might be, no company can survive without turning dollars into profits, and that's where Block comes up short. It has been in business long enough, and is big enough, to be producing profits at scale. If it can't become efficient enough to consistently churn out profits, and increase them, the entire business is at risk.
Management has taken some steps to become more efficient. It eliminated thousands of jobs and is capping its worker count at 12,000. It says this is forcing it to prioritize its resources and put people in more efficient roles. It's also looking at how its business as a whole can target a larger population to generate higher revenue per customer.
This all sounds nice in theory, but fintech has become a crowded sector. Block has great products, but it needs to stand out from the pack and make its products more cost efficient to compete. Management has to show investors consistent profit to gain their trust.
Image source: Block.
Hold: Management is figuring things out
Block stock is down 67% in the past three years. There aren't enough proven results for investors to feel confident to take on this risk.
Management is getting some praise for working on its problems, and the stock is up about 8% during the past year, trailing the market but moving in the right direction.
There's more to work on. Management went off track when it veered too much into blockchain technology and Bitcoin, and these still play more of a role in Block's business than many stock investors want to see.
There are solid reasons for whatever approach you want to take with Block shares. But unless you really love risk, I say go with the "sell" camp. There are many other stocks that look like more of a sure thing and offer more bang for your buck right now.
