Shares of Block (XYZ 5.29%) fell like a brick from the sky on Feb. 21, dropping by 18% after an underwhelming fourth-quarter earnings report.
For the fourth quarter, the financial technology giant posted earnings per share (EPS) of $0.71, well below the $0.89 Wall Street estimate. The company's gross profit growth rate of 14% during the holiday shopping season marked a sharp slowdown compared to the 22% pace in the prior year quarter. Despite the extreme market reaction, the company projected optimism in its outlook, targeting stronger growth and expanding profit margins in 2025.
With the stock now down about 33% from its 52-week high, is Block stock a buy now? Here's what you need to know.
Mixed signals into 2025
A lot has changed for Block during the past several years. From simply a payment processor and point-of-sale solution with the original Square brand, the company has transformed itself into a broader ecosystem of financial services. The company's Cash App platform has emerged as a consumer finance powerhouse. Beyond peer-to-peer transfers, users are utilizing a growing number of products like the Cash App card, banking options, and the Afterpay buy-now-pay-later (BNPL) lending option.
Block has done a good job of improving monetization. In Q4, Cash App's attach rate, which measures the percentage of users adopting additional products or services, reached 44%, up from 41% in the prior-year quarter. Users are making more transactions on average, which is adding to profitability. Cash App gross profit per monthly transacting active accounts climbed by 13% year over year to $47. For the full year 2024, adjusted EPS of $3.37 was up an impressive 87% from the $1.80 result in 2023.
Image source: Getty Images.
Other indicators, however, suggest weaker underlying growth momentum. The 57 million active Cash App users were up just 1.7% from 56 million at the end of 2023. There is also some concern that the Square segment, which generated a 6.9% increase in gross purchase value in the U.S. from last year, is losing market share to industry rivals like Fiserv or Toast, which are generating stronger growth.
The dynamic is captured in the company's 2025 outlook. Even with a forecast of a 15% increase in annual gross profit alongside a 21% adjusted operating margin, Block is expected to take a temporary step back from its goal of achieving the "Rule of 40." This measure adds the percentage increase of gross profit growth and adjusted operating margin, which the company projected at 35.5% for 2025, below the 36.5% result in 2024.
| Metric | 2024 | 2025 Estimate |
|---|---|---|
| Gross profit | $8.89 billion | $10.22 billion |
| Gross profit growth (YOY) | 18% | 15% |
| Adjusted operating income margin | 18% | 21% |
| Rule of 40 | 36.5% | 35.5% |
Source: Block.
Reason for optimism
Even if the latest company update tempered expectations, there are several reasons to remain optimistic that the company can ultimately outperform, including catalysts on the horizon that could reaccelerate growth.
Key developments include the integration of Afterpay with the Cash App card. By offering easier access to the BNPL functionality to the more than 25 million Cash App users, the hope is to capitalize on more frequent transactions as a new growth driver. There is also anticipation building for the company to ramp up its Bitcoin mining infrastructure with a suite of products through the Proto initiative. Block's scale and its diversified platform highlight an advantage compared to other fintech players that specialize in only one area of digital financial services.
What I like about Block is its valuation, with a forward price-to-earnings (P/E) ratio of just 14. This level could prove to be a bargain, particularly if the results during the next few quarters help add confidence that the company's growth strategy is working.
A chance to buy the dip in Block
I believe Block's outlook is strong enough to stay bullish on the stock. For investors with a long-term time horizon, shares of Block are a great option to gain exposure to fintech innovation, BNPL, and cryptocurrency adoption. The recent sell-off presents a compelling opportunity to buy shares of a beaten-down industry leader that is well positioned to rebound.
