The S&P 500 index continues to ascend to new highs, but that doesn’t mean you can’t find stock deals. Block (SQ -0.82%) is one stock that has failed to bounce back with the broader market and remains down 75% from its all-time high price from a little over two years ago.
Block is taking steps to achieve sustainable growth and better profit margins, an initiative that will take a couple of years to achieve. The company has shown solid progress thus far, but is it enough for investors to buy the stock today?
Block’s Cash App is the most widely used investment app
Block specializes in helping people and businesses move money around. Its early product was the Square point-of-sale system, which helps small businesses process payments and manage sales. A few years later, the company released Cash App, which allows people to easily send and receive money, make direct deposits, and buy and sell stocks and Bitcoin.
Cash App has become an increasingly important part of Block’s business. Its investing features, in particular, have attracted customers across all generations. According to The Motley Fool’s Generational Investing Tools survey across 2,000 U.S. adults, Cash App is the most used investing app, with 38% of all respondents saying they use it. Usage is even higher among younger generations, with 54% of millennials and 50% of Gen Z using Cash App for investing.
Image source: Getty Images.
Block seems well positioned with younger generations in particular, which should help its long-term growth. However, the company must rein in expenses after seeing its net income decline yearly from 2019 to 2022. It also aims to better integrate all of the features from Square, Cash App, and Afterpay, its buy now, pay later platform.
Last year, CEO Jack Dorsey laid out his vision for streamlining operations and becoming more efficient. As part of this, Block set a goal to reach the “rule of 40,” meaning its gross profit growth and adjusted operating income margin will add up to 40% by 2026. To accomplish this, Block has capped its employee count at 12,000 while cutting costs and improving the bottom line.
So far, so good for the fintech. Block posted net income of $102 million in the fourth quarter. That grew to $472 million in the first quarter, with growth across both businesses. In the quarter, Cash App gross profit grew 25% year over year to $1.26 billion, while Square gross profit grew 19% to $820 million.
SQ Revenue (Quarterly) data by YCharts
Keep an eye on this
As more payments go digital, fintech companies have felt pressure from the federal government to prevent fraud and ensure compliance with anti-money laundering laws.
Block is reportedly facing federal scrutiny of alleged compliance lapses at its Square and Cash App businesses after a former employee alleged years of problems.
Investors will want to monitor this situation, which could result in fines or additional oversight teams, according to analysts at Macquarie. While this could increase costs for the fintech, the analysts don’t see any structural limitations on the types of business Block can do.
Where does Block go from here?
Block plans to continue to streamline its business and focus on efficiency. According to Dorsey, the company wants to provide its customers with connected tools and better integrate Square, Cash App, and Afterpay. He said, “We believe combining the two ecosystems [Square and Cash App] enables us to provide consumer experiences others can’t, specifically for commerce.”
Bitcoin will also play a big part in Block’s future plans. In 2018, the company first offered customers the ability to buy and sell Bitcoin on Cash App. Today, it allows customers to round up transactions to purchase Bitcoin or sellers to convert up to 10% of sales into Bitcoin.
In Q1, Cash App’s Bitcoin gross profit was $80 million, up 59% from year-ago period. Block will continue to bet big on the cryptocurrency’s future success, with plans to invest 10% of its gross profit from Bitcoin to purchase more Bitcoin. Dorsey has long advocated for Bitcoin, and now Block’s future success will be linked to the cryptocurrency.
Is Block stock a buy?
Block is making good progress on its cost-cutting and efficiency goals, as evidenced by its two consecutive quarters of net profit. Cash App is well positioned, especially among younger investors, which should benefit the company going forward. It’s also investing heavily in Bitcoin, so future results could be closely linked to the cryptocurrency’s price down the line.
Investing in Block is a bet on the company’s efficiency initiatives along with Bitcoin, and the stock will likely face elevated volatility along the way. If you’re OK with taking on these risks, Block is a solid stock to scoop up and hold for the long haul.
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