Big Changes Are Coming for Block. Should You Buy the Stock Before the Shake-Up?

Block (SQ 0.80%) is in the midst of a shake-up, including a hiring freeze and a business reset. In this latest move, co-founder and CEO Jack Dorsey told employees he plans to restructure Block, warning them that it could feel disruptive.

The move is one of many as Dorsey looks to get Block back on a good growth trajectory after years of ballooning expenses. With the stock 79% below its all-time high price of $289 a share in 2021, is now a good time to buy Block?

Block’s big shake-up aligns with the company’s long-term goals

In an internal memo to employees, Dorsey said he plans to restructure Block by removing business silos and disbanding the company’s business unit reporting structure, according to Fortune. The move would take Block back “to how we started as a company” and will address Block’s “three problems” relating to “collaboration, craft, and flexibility.”

Block is currently organized by its various business units:

• Square, its point-of-sales commerce solution
• Cash App, its popular cash management and investment app
• Tidal, its music streaming service
• TBD, its open developer platform focused on decentralized finance (DeFi)
• Proto, its mining chips and other solutions for the Bitcoin network
• Its foundational team

Each business unit has separate engineering, design, sales, and marketing teams. Dorsey wants to rethink how Block is doing things. He said this reorganization will feel “big and disruptive or uncomfortable” for employees.

The move aligns with what Dorsey has advocated in his letters to shareholders over the past several quarters. In the third quarter, Dorsey said he wanted to “reset the relationship with Square and Cash App and restructured Afterpay to ensure a stronger connection between each” and that “combining the two ecosystems enables us to provide consumer experiences others can’t, specifically for commerce.”

Image source: Getty Images.

In the fourth quarter, Dorsey discussed Block’s plan to centralize its teams and functions to reduce duplication of work. This was around the same time Block announced plans to limit its employee count to 12,000. Dorsey said, “We expect to keep this cap in place until we believe the growth of the business has meaningfully outpaced the growth of the company.”

In the context of Dorsey’s previous comments, the restructuring of Block makes perfect sense. However, there are concerns that it might indicate that Block is making “slower progress on initiatives,” according to Macquarie analysts, as The Fly reported.

Today, Block’s price-to-earnings ratio is 77.3 due to its ballooning expenses and lower earnings in recent years. However, it’s priced at just 1.66 times sales, which is near the low end of its valuation since it went public in 2015. Block is priced at a forward PE ratio of just 14 based on one-year forward earnings, as analysts expect a strong earnings rebound next year as it reigns in its expenses and continues growing its key offerings. However, the lower forward valuation may reflect investor uncertainty about whether Block can execute its goals and achieve those optimistic earnings growth projections next year.

SQ PS Ratio data by YCharts.

Is Block a buy?

Block is an intriguing company that hasn’t maximized its potential. The company operates the popular Cash App, the most-used investing app among millennials and Gen Z, according to The Motley Fool’s Generational Investing Tools survey of 2,000 U.S. adults. Its payment ecosystem extends to merchants through Square, and it is also making moves in Bitcoin from both the payments and the hardware sides.

Block is transitioning and needs to execute its plans, but it’s reasonably priced and could provide an attractive entry point for long-term investors today. However, if you’re not sold, keep an eye on its earnings progress, and pay attention to management’s comments about integrating the various products.

Dorsey’s move to restructure the company is part of plans that were laid out several quarters ago. This shows Block is taking uncomfortable but necessary actions to streamline its business and integrate its products, which could pay off in a big way as payments become more digital over the next decade.