The S&P 500 might be up 12% in 2024 (as of Aug. 2), but not all businesses have benefited. Shares of Block (SQ +0.07%) are down 22% this year, and in the past five years, they have declined 25%.
Despite that disappointing performance, investors might see an opportunity to add the company to their portfolios. Is Block a smart buy for your long-term portfolio?
Driving profitable growth
Since it's founding in 2009, Block has found success by blending financial services and technology, otherwise known as fintech. It has registered tremendous growth over the years as it rapidly brings on customers.
The Square segment caters to merchants and their various needs, whether that be handling payments, getting access to working capital, managing employee payroll, or running marketing campaigns. Gross profit rose 15% year over year in Q2 (ended June 30).
Block also targets individual consumers with Cash App, a popular mobile finance app that allows customers to send or receive money, invest in stocks, or sign up for a debit card. As has usually been the case, this segment posted faster growth than Square, with gross profit up 23%.
It's understandable to assume that a growth tech business like Block isn't profitable. But management has focused intensely on cutting costs, and it's working. In the last quarter, Block posted adjusted operating income of $399 million, compared to $25 million in the same period last year. The forecast is to generate more than $1.4 billion in adjusted operating income for all of 2024.
NYSE: SQ
Key Data Points
Block's big picture
It's easy to be optimistic about this company's future. The executive team estimates a combined total addressable market (based on gross profit) of $190 billion between Square and Cash App. Block will continue utilizing its typical playbook to gain customers and boost their usage by introducing new product features and expanding into new markets.
Financial services more broadly, and the payments space more specifically, are very competitive. There are many businesses all trying to carve out their successful corner of the industry. Block has been successful because it has some competitive strengths working in its favor.
I'd argue that the company benefits from switching costs. Merchants who lean on Square as a mission-critical partner are probably somewhat locked into the ecosystem. And consumers who handle basic banking needs via Cash App also probably feel no need to change providers, except for more complex tasks.
Plus, there could also be network effects at play. As Square and Cash App become further integrated, the addition of more merchants and consumers immediately makes the platform more valuable to everyone involved. This setup adds durability to Block's operations.
Bullish on Bitcoin
There's a lot to like about this business. But one thing is for certain: Prospective investors should only buy the stock if they are bullish on Bitcoin. That's because founder and CEO Jack Dorsey has publicly mentioned his belief that this top cryptocurrency will one day become the native currency of the internet.
Cash App has facilitated the buying and selling of Bitcoin since 2018. And this service brought in $67 million in gross profit in Q2, or 3% of the company total.
But now, there are numerous initiatives underway at Block focused on boosting Bitcoin adoption. While Dorsey says only 3% of business resources are used on Bitcoin-related projects, investors need to be aware that this is a priority for the leadership team. If you want exposure to this leading digital asset, but via a company that sells in-demand financial products and services, then perhaps Block is the right choice.
Set up for big returns
According to Wall Street consensus analyst estimates, Block is projected to grow its adjusted diluted earnings per share at an annualized clip of 46% between 2023 and 2026. Always take these forecasts with a grain of salt. But it clearly shows the perspective that the business is set to seriously expand its bottom line.
Consequently, the current forward P/E ratio of 16.7 means the stock looks like an absolute steal today. This makes Block a worthy investment candidate.
