• Block, Inc. broke out of a two-year range in December 2024, driven by its strong and underappreciated ecosystems in Square and Cash App.
• Square’s POS systems empower SMBs with essential digital tools, creating a sticky, long-term customer base despite temporary inflationary headwinds.
• Cash App’s integration with Square, including rewards and financial services, enhances user engagement and shareholder value.
• I am highly bullish on Block, considering it my top long pick for 2025, with significant growth potential in its intertwined ecosystems.

After a post-COVID boom and the sharp selloff during the inflationary bust that followed, Block, Inc (NYSE:SQ) remained range bound for over two years. The stock finally broke out during the first trading week of December, bringing renewed attention to the beaten down Fintech.

I initiated coverage of Block in February of 2023. Much of the narrative that existed in early 2023 still exists today: the company has two sprawling ecosystems that it has been stitching together for several years. Each segment has its own distinct market positions and competitive advantages. These segments work in harmony to create an enormous opportunity for Block that I believe the market is underappreciating. I believe Block could be one of the best, if not the best, performing stocks in 2025. Block is my top long pick for 2025 and I am more bullish than ever on the company.

Square

The Square segment, offering POS (point-of-sale) payment terminals, has given SMB’s (small-to-medium sized businesses) access to a suite of hardware and software required to run a modern, digital native business. It allows businesses of all sizes to build websites, track inventory, facilitate vendor orders, manage timesheets, pay employees, run marketing campaigns, start rewards programs, schedule client appointments, and a host of other services that are critical to scale a business in the internet age. Block focuses on several distinct verticals with unique needs like restaurants and beauty shops, but the product set is broadly the same.

Square carved out a strong market position by following a ‘trust, then verify’ model for merchant onboarding. This flew in direct opposition to the prevailing approach at the time and solved a key issue facing many small merchants. The company was founded in 2009, at a time when it was becoming clear that businesses had to accept card payments to survive and scale. At the time, processing card payments required a bank account. However, many very small merchants (think: your local farmers market) struggled to get bank accounts because they didn’t have meaningful sales. They struggled to generate meaningful sales because they couldn’t accept card payments! Banks are conservative institutions, especially in 2009 in the wake of the Great Financial Crisis, so they follow a ‘verify, then trust’ approach to KYC (Know Your Customer).

Jack Dorsey and his Cofounder Jack McKelvey solved this issue by creating a tiny dongle that attached to smart phones and processed card payments without requiring a bank account. This technology quickly began spreading in a very grassroots way, and today many companies have grown because Square opened them to the world of electronic payments.

This market is more saturated today than it once was, and Square’s GPV growth has been in sequential decline for a few quarters. Inflation weakened the consumer while rapidly rising rates reduced access to cheap capital for SMBs. These are temporary headwinds that matter little to Square long-term. Square’s product set becomes extremely entrenched once businesses have grown with it. The longer a merchant uses Square, the stickier it becomes. Now, Block is focused on deepening its product set with new hardware and software offerings, expanding traditional banking services with loans and lines of credit, and making it easier for businesses to buy bitcoin. Finally, tying the Cash App ecosystem more closely together with the Square ecosystem has been the key focus in 2024. Cash App users can see their rewards balances with Square merchants in the app, can access cheap short-term debt with Afterpay, and can see Square merchant advertisements as well. Tying the square ecosystem closer together with Cash App will generate enormous value for shareholders over time, but the benefits will take time to fully materialize.

Cash App

Similar to Square, Cash App carved out a sticky customer base driven largely by a differentiated go-to-market strategy. Unlike Venmo, a Cash App account doesn’t require linking an external bank account. New users can be onboarded simply by receiving money from an existing user, making the CAC (customer acquisition cost) extremely low. Ease of onboarding plus referral bonuses allowed Cash App to easily proliferate its target markets but has also resulted in a user base with a much lower average net worth than Venmo.

Cash App’s relatively loose KYC standards (which have been improving) attracted a certain narrative about the user base that was the target of a short report in 2023. I discussed the report here. There were accusations of inflated user base metrics and rampant fraud, but the company shrugged the report off and Cash App has continued to grow well. Block did tighten up KYC standards and worked to collect more accurate information on all users, with stepped up KYC requirements based on transaction complexity. For example, a simple P2P (peer-to-peer) payment only requires a Cash App account, which only requires name and phone number. However, if you want a CashApp Card, to buy or sell Bitcoin or stocks, or to open a savings account, you’ll need a government issued ID, a social security number, and a range of other basic KYC information.

Cash App has a sticky user base because it catered to an underserved population. Many Cash App users wouldn’t have access to modern financial tools without the app, so it has naturally become indispensable to them. The company has leaned into this with the “Banking Our Base” strategy set off in 2024. Management is focused on deepening the Cash App product suite and making it more enticing for higher-income individuals and families too. Users can access high-yield savings, setup direct deposit, buy/sell bitcoin and stocks, and can even manage their taxes in the app. Users can also get a debit card linked to their Cash App.

As with all Fintech apps, user quality is of utmost importance for sustained success. The best way to increase user quality is by deepening relationships either by attracting new money from existing users or by increasing average products per customer. Block has mostly focused on products per customer, but the Bitcoin bull run has also made many Cash App users richer. Cash App users selling their bitcoin not only generates fee revenue for Block but also essentially brings new money into the ecosystem. By expanding access to financial services, Cash App has created a robust network of stick users that add enormous value to the Block enterprise.

With the Banking Our Base strategy, Block has effectively scaled a modern-day digital bank without any of the expensive brick-and-mortar overhead. Traditional big banks have high customer acquisition costs, long onboarding periods, strict KYC requirements for basic services, and outdated technology. They attempt to attract customers by offering the best rates (which is a race-to-the-bottom pricing game), the fullest product set, and relationship-based servicing. Cash App did this the opposite. It attracted a sticky user base by offering a quality product for free. Then, the company built out its product set and deepen relationships with its users. This has resulted in a culture of trust for Cash App and has led many people to become dependent on it for their financial livelihood. Cash App is becoming increasingly like SoFi (SOFI) and decreasingly like Venmo.

Today, the market basically only analyzes Block’s enterprise value as a sum of parts of the Square and Cash App segments. This isn’t appropriate. Block is one of the leading providers of Bitcoin services and is an enormous benefactor to Bitcoin’s ongoing rise. Ignoring Block’s bitcoin business is a critical error in analyzing the company.

Bitcoin

The Bitcoin network achieved a major milestone and recently eclipsed $100,000 per bitcoin. At face value, this benefits Block enormously. For one, Block maintains one of the largest corporate bitcoin treasuries, holding 8,068 btc. The company has also begun dollar-cost-averaging into a larger btc position by using 10% of its Bitcoin gross profit to buy additional btc. Second, as mentioned earlier, Block allows both Square merchants and Cash App users easy access to buy bitcoin. Any Square merchants or Cash App users that used these services have become richer with money that is invested in Block’s network. Any buying or selling of bitcoin results in fee revenue for Block and as merchants or users sell their bitcoin at a profit they’ll bring more cash into Block’s ecosystem organically. By allowing easier access to the Bitcoin network, Block is enriching its user base. It doesn’t stop there, though.

A market price of $100,000 means that there is approximately $46.8m in new bitcoin minted each day (using 3.25 btc minted every 10 minutes). Bitcoin mining, the process of solving puzzles on the blockchain to earn bitcoin rewards, is a highly competitive industry that depends on highly specialized hardware. With nearly $50m in new btc being created daily, the mining industry has blossomed into highly competitive space. Similar to AI companies, Bitcoin miners need the best hardware to win. Bitcoin mining ASICs are distinctly different from traditional CPUs and GPUs, which has led the hardware market to be relatively underserved. Most leading-edge mining ASICs are supplied by Chinese companies. Many American chipmakers are now much more focused on AI than anything else. Meanwhile, the Proto team at Block is trying to challenge Chinese dominance in the mining hardware space.

Block has already made headway into this market when they announced the design and tape-out of a 3nm mining ASIC earlier this year. Then, they announced the coming availability of a Mining Development Kit (“MDK”) to bring flexibility and support for a broad range of use cases. Finally, the team came to an agreement to supply nearly 15 EH/s (exa-hashes per second) worth of mining chips to Core Scientific (CORZ). This was announced in July of 2024, and in November of 2024 the company formally announced the Proto division.

The biggest barrier to entry for mining hardware is the ability to design high quality chips. Block has plenty of experience with chip design since Square terminals have used custom ASICs for years. By offering a leading-edge chip, a flexible platform, and high-quality software interfaces, Block believes it can win a strong position in the mining chip market. The bitcoin mining hardware industry is a multi-billion dollar per year industry whose demand will grow in lockstep with the price of bitcoin.

Investor Takeaway

Despite being a leading beneficiary to Bitcoin’s rise, Block’s stock price has not followed bitcoin’s price much this year. The market is entirely ignoring both the existing benefits (richer Square merchants and Cash App users) and the benefits looming on the horizon (winning market share in the mining hardware business). For these two reasons, I believe the market misunderstands Block’s enterprise value from the ground up. Investors are only focused on Block’s role in traditional finance, something that will change as the Proto division begins driving profitable growth for Block’s bitcoin segment in 2025. Proto will begin driving meaningful growth next year and I believe that the market will wake up to this opportunity when that begins.

For these reasons, I believe Block is one of the best stock picks approaching 2025 and strongly believe an inflection is looming.

Editor’s Note: This article was submitted as part of Seeking Alpha’s Top 2025 Long/Short Idea investment competition, which runs through December 21. With cash prizes, this competition – open to all analysts – is one you don’t want to miss. If you are interested in becoming an analyst and taking part in the competition, click here to find out more and submit your article today!

Analyst’s Disclosure: I/we have a beneficial long position in the shares of SQ either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Block: The Bitcoin Inflection Is Looming appeared first on Up2info.com.

• Block continues to increase its revenue, and gross profit, as on a YoY basis, they have increased by 8.88% and 14.47%, while the gross profit margin expanded to 36.35%.
• SQ is now profitable and is expected to grow their EPS by 59.04% over the next 2 years, placing their forward P/E under 20 based on 2026 earnings.
• A lower rate environment is bullish for SQ, as it could lead to increased loan originations and increased merchant transactions.

Block, Inc. (NYSE:SQ) isn’t one of my favorite companies, and I am not a shareholder, but I have to respect their progress despite their excessive stock-based compensation payouts. Now that a new administration is coming in that is pro-crypto and David Sachs has been appointed the AI and crypto czar, I think there is going to be a resurgence in the crypto industry that will benefit SQ tremendously. SQ has been delivering on many of its objectives, and after going through the Q3 report, I find it hard not to believe they will do well in the future. SQ has a strong ecosystem and balance sheet, and I can’t ignore that their forward EPS and revenue growth rates make the current share value look inexpensive. I don’t think it will be as easy to find depressed value plays in 2025, but shares of SQ look like they are breaking out and can continue to grow. I am now bullish on SQ, and I am considering starting a position before 2024 is over. I think that the tailwinds will be too strong for SQ to come back down into the $60s, and even though shares are up more than 27% YTD, there is still plenty of upside for investors who have time on their side.

Following up on my previous article about Block, Inc.

SQ is a company that many investors ask me about, and I previously wrote an article about it back in April (can be read here). Once I became very bullish on PayPal (PYPL) I started really paying attention to SQ. In my last article, I explained why I was neutral, and for a period of time, it looked like not going bullish was the right call until it wasn’t. Shares of SQ have been breaking out and have almost doubled from their 52-week low. A lot has changed since my last article as SQ has strung together several consecutive quarters of profitability, a new administration is coming in that is pro-crypto, and the Fed has started cutting rates. I am upgrading my investment thesis on SQ to bullish as the narrative is changing, and I think they will continue to do well over the next several years.

Risks to my investment thesis on Block, Inc.

Just because I am turning bullish on SQ and looking to start a position does not mean that I am correct or that this investment will work out. There are several risk factors that could negatively affect my investment thesis. SQ has more exposure to Bitcoin (BTC-USD), and if BTC-USD experiences a decline in value, it could negatively impact SQ’s share price. While the new administration is taking a pro-crypto stance, until we see their official position, there could still be regulatory uncertainty and potential challenges for SQ. Cybersecurity threats continue to increase, and SQ is a leading fintech company that is a high-profile target for cyberattacks. If a hacker group is successful, it could lead to reputational damage and SQ’s user base moving its assets off the Cash App environment. In the event that we experience macroeconomic headwinds, consumer spending could be impacted, which would negatively impact the revenue generated from SQ’s merchant activity. Investors should consider these risk factors and do their own due diligence before making an investment in SQ.

I am still not thrilled with the amount of stock-based compensation being awarded at Block, Inc.

One of my biggest criticisms about SQ is the amount of stock-based compensation they are issuing compared to their level of profitability. I am not opposed to companies issuing stock-based compensation as part of their incentive structure to retain and motivate employees, but at some point, it becomes excessive. The fact is that since the 2014 fiscal year, SQ has generated $670.40 million in net income and has been profitable for 5 out of the past 11 years, assuming they maintain profitability in 2024 once the Q4 results are released. In 2023 alone, SQ issued $1.28 billion in stock-based compensation, which is more than the past 11 years of profitability. Over the past 11 years, SQ has issued $5.57 billion in stock-based compensation, which is drastically more than the $670.40 million in net income generated over this period, and more than the $2.88 billion in cash from operations or $1.86 billion in free cash flow (FCF) generated since the 2014 fiscal year.

To me, this looks like corporate greed, and it was the main reason why I never became a shareholder. It’s hard for me to justify why a company would pay $1.28 billion in stock-based compensation in 2023 when the company generated $9.8 million in net income and -$50.20 million in FCF. The numbers look much better in the trailing twelve months (TTM), but the $1.29 billion in stock-based compensation SQ has paid is still more than the $1.05 billion in net income and $717 million in FCF generated. The only saving grace at this point is that SQ is generating more profitability than it ever had, and it looks like they are in a position to scale the amount of cash from operations and net income their underlying businesses are producing. Just because I am turning bullish on SQ doesn’t mean that I am turning a blind eye to these metrics, and I will continue to monitor if they improve.

Block, Inc. is delivering for shareholders and I think that the macroeconomic environment sets up well for them

It’s hard to deny that SQ is operating a successful business in which many individuals find value. From providing merchant services to businesses and a suite of financial products to individuals, SQ is able to generate tens of billions in revenue on an annual basis. Since 2014, SQ’s revenue has increased by 2,706.57% ($23.01 billion) from $850.20 million to $23.86 billion, while its gross profit has grown 3,719.55% ($8.45 billion) from $227.10 million to $8.67 billion. On a YoY basis, SQ has grown its revenue by $1.95 billion (8.88%) and its gross profit by $1.09 billion (14.47%) in the TTM. SQ is also improving its gross profit margin as it’s increased from 25.15% in 2021, when shares were at all-time highs, to 36.35% in the TTM. The trajectory of revenue and gross profit growth is what I want to see when I research a company. SQ continues to get bigger, and the analyst community believes that revenue will continue to grow at a double-digit pace over the next several years.

SQ’s strategy is working, and they are looking to transform roughly 24 million Cash App Cards into what they believe will be a stronger alternative to traditional credit cards when Afterpay is launched on the Cash App Card. SQ’s ecosystem of Square Loans, Afterpay Buy Now Pay Later, and Cash App Borrow are critical to their continued success and margin expansion. Since 2013, SQ has underwritten $22 billion in global loans with an aggregate loss rate that is below 3%. SQ may have found a way to outcompete traditional credit card companies by going after an underserved market of U.S. adults who are unable to access credit through the traditional financial sector. SQ acquired Afterpay and launched Cash App Borrow, which has been a success. Since the acquisition of Afterpay, consumers have exceeded $72 billion in spending, which has led to more than $1 billion being saved on late fees and interest. Afterpay has created an ecosystem that has become a driver of advertising revenue for SQ, as it’s created 460 million leads to merchants over the TTM while having over 138 million customer visits. SQ’s underwriting and actuarial process has allowed them to sustain a loss rate that is roughly 1% for buy now pay later, under 3% for Cash App Borrow, and 4% or less for recipients of Square Loans.

I like the metrics and the top and bottom-line growth I see in SQ’s underlying businesses and their quarterly numbers. CME Group is projecting that there is an 85.1% chance that the Fed will cut rates by another 25 bps later this month, while the Fed Dot Plot indicates that rates will decline to 3.5% in 2025 and 3% in 2026. A lower-rate environment is bullish for SQ as it will lower its borrowing costs, stimulate the economy, and incentivize businesses to tap into the debt markets to grow. Of the $22 billion in loans that SQ has provided, 58% of Square Loans are to women-owned businesses, and 36% were to minority-owned businesses. When interest rates decline, the cost of capital becomes cheaper, and it is likely that merchants utilizing SQ’s services will continue obtaining loans from SQ. This is only the first part of the flywheel because SQ is likely to benefit from increased consumer activity and benefit from additional payments flowing through their merchant portals.

I think there is value to be unlocked in Block, Inc. and shares will continue to rally

SQ increased its Q4 guidance for Adjusted EBITDA, Adjusted Operating Income, and their margins. Previously, SQ guided for $2.9 billion in Adjusted EBITDA and $1.44 in adjusted operating income. They raised guidance after Q3 and are now projecting that their Adjusted EBITDA will be $3 billion and Adjusted Operating Income will come in at $1.56 billion. The margins will increase from 33% to 34% for Adjusted EBITDA and increase from 16% to 18% for Adjusted Operating Margin. In Q4, SQ is guiding for $2.31 billion in gross profit, which is a 14% YoY growth rate. SQ has a strong balance sheet with $8.86 billion in cash and short-term investments on hand, with only $5.93 billion in long-term debt. Now that SQ is profitable, their lending business become less risky, and there is more than enough cash on the balance sheet to facilitate increased originations from a lower rate environment.

I have to agree with the bulls that SQ is going higher after going through the data and looking at the consensus estimates. SQ is expected to deliver $3.54 in EPS in 2024, placing its P/E at 27.77 based on this year’s earnings. SQ is expected to deliver 29.86% EPS growth next year and another 22.59% in 2026. Over the next 2 years, SQ is expected to grow its EPS by 59.04% as they add an additional $2.09 of EPS to its bottom line. This means that SQ is trading at 17.45 times their 2026 estimates, which is cheap, in my opinion, based on their growth trajectory. SQ’s revenue forecast also looks strong, as it’s supposed to grow at double-digit rates for the next several years and exceed $30 billion in 2026. I think there is a lot of value to be unlocked as long as SQ keeps delivering.

Conclusion

I am not currently a shareholder of SQ, but I see that changing over the next several weeks. I am not catching SQ at the bottom, but when I look at a long-term chart, I find this price point very interesting. Investors are able to purchase shares for the same price as they were at the end of 2018 while the company was still unprofitable at a much cheaper valuation. I think that shares are starting to break out and will continue higher over the next several quarters. If SQ goes to $150, I don’t think anyone would be surprised, considering it is trading at less than 20 times 2026 earnings, and investors still remember the days when SQ had a share price that exceeded $200. I think SQ will benefit from a strong economy and that the macroeconomic environment is setting up well for its underlying businesses. SQ should also benefit from a pro-crypto environment, as there could be more transactions on Cash App for BTC-USD and other cryptocurrencies over the next several years.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of PYPL, BTC-USD either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I am not a shareholder of Block Inc yet, but I plan on becoming a shareholder in the future

Disclaimer: I am not an investment advisor or professional. This article is my own personal opinion and is not meant to be a recommendation of the purchase or sale of stock. The investments and strategies discussed within this article are solely my personal opinions and commentary on the subject. This article has been written for research and educational purposes only. Anything written in this article does not take into account the reader’s particular investment objectives, financial situation, needs, or personal circumstances and is not intended to be specific to you. Investors should conduct their own research before investing to see if the companies discussed in this article fit into their portfolio parameters. Just because something may be an enticing investment for myself or someone else, it may not be the correct investment for you.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Block: I Am Upgrading My Outlook To Bullish appeared first on Up2info.com.

• Block, Inc. trades in sympathy with Bitcoin but hasn’t matched Bitcoin’s recent gains, reflecting its minimal profit from Bitcoin-related activities.
• Despite past unprofitability, Block’s gross profits and adjusted EBITDA have shown consistent growth, with a 20% YoY increase in gross profits.
• Risks include competition from larger fintech firms like PayPal and Visa, and potential overvaluation relative to recent market performance.

Introduction

Block, Inc. (NYSE:SQ), which most people known only by the name of its flagship products Square and Cash App, is a fintech giant founded by Twitter-founder Jack Dorsey. Dorsey is still the CEO, and has been since SQ’s founding in 2009. Block has an interesting stock price chart, with a massive whiplash that followed a crypto frenzy so frothy that Block changed its name from Square as a nod to cryptocurrencies and the blockchain.

Sympathy with Bitcoin

However, since Bitcoin’s (BTC-USD) return to prominence this year, Block hasn’t quite kept up.

Block was one of the most adversely hit tech companies during 2022 as it trades not only in sympathy with small businesses (due to Square), but also Bitcoin itself, as shown by the chart above. So when stagflation hit, interest rates rose to 5%, and both small caps and crypto were crushed, SQ fell hard. From 1/1/21 to now, Block is down almost 55%.

YTD, we’ve seen a continuation of some crypto sympathy, with a detangling of the correlation through Q3 and a return to near-perfect correlation last month. This is an interesting pattern to follow, as SQ really does seem to trade in line with Bitcoin when you overlay their charts like this.

But Bitcoin isn’t down 55% over the last few years, SQ is. Bitcoin is at all-time highs, in fact. Looking back at end of ’21 and beginning of 2022 when the crushing began, Block is still far below that, while BTC is far above and now at all-time highs.

It seems that even though Block trades in sympathy with Bitcoin, it does so at such a low rate that it isn’t benefitting from the violent upswings in the cryptocurrency. The disparity began with this last bull run, one that is still ongoing for crypto.

Here’s the rub: Bitcoin isn’t that profitable for Block.

Looking at their latest financial statements, we can see that up through the end of Q3, they did close to $7.8B in Bitcoin revenue, incurring almost $7.6B in Bitcoin expenses. Their profit from Bitcoin-related business was about 2.8% of revenue left after costs. That is a pitiful amount compared to their transaction-based revenue margins, which is over 52%. The actual profit left over is also about 1/10th of the profit from transactions.

Bitcoin not being a big profit generator for Block resonates with why it hasn’t taken off as fast as Bitcoin has. Square has fallen off this last big run-up due to its surprisingly small reliance on Bitcoin for any source of value. Its transaction volume is still the vast majority of its revenue.

They have so little to do with cryptocurrencies and Bitcoin in particular that it nor the Blockchain or any cryptocurrency are mentioned in the Q3 investor presentation. They did mention AI, though.

It’s also unclear how much Bitcoin operability influences Cash App users’ decision to use the platform.

The Financials

So what about the business itself? If Bitcoin isn’t seeming to help pull this back up to all-time highs, then investors will need to help that Block itself will create value for shareholders themselves.

This is where Block impressed me. In their Q3 investor presentation, they focused on a few things, but the biggest one was improving profitability. Gross profits are up, and have been consistently growing quarterly around 20% YoY for the last year.

This comes on the heels of several years of this kind of growth, something that has impressed shareholders, but not enough to move the stock back to the frothy highs it was at in 2022.

Recovering from unprofitability is difficult, and SQ has managed it decently. While their net income is varied over this past year, they have had several profitable quarters in a row, which gives me confidence as a potential investor.

I have a rule about not investing in unprofitable companies, with few exceptions.

This trend is new, as Block, Inc. mostly has a history of losses, so it’s unclear if this profitability will last. It could continue on, or fall again as it has in the past after very profitable seasons.

Adjusted income is a very good-looking chart from an investor perspective. Almost 70% YoY growth in adjusted EBITDA is a great success for Block, especially one that is still 65% off its all-time highs.

Customer funds have also increased substantially YoY, with a 21% increase.

Put that together with growing monthly actives in both Cash App and Square, Block’s flagship products, and you can see why there is a narrative here that Block could swing back up to its former highs.

I particularly like to see the inflow per transacting active climbing, showing us that users are bringing more to the platform than before, a YoY increase of 8.5%.

Risks

There are some holes to poke here. The first is that Block’s flagship products have to compete with larger firms like PayPal (PYPL) and Visa (V). They could lose market share in the future, even if they are one of the favorites of the younger generation. They are not the most monetizable audience in the fintech space. PayPal, by contrast, carries more favor with basically all age groups and also has its own crypto-buying program to compete with Block on top of the P2P payment system.

There is also a problem with operability, since Cash App doesn’t have the same kind of partnerships with banks that Zelle does, or the monopoly-like grip of Apple Pay (which is on the rise!).

There is also the risk of a heightened valuation, which SQ has even if it’s far below its frothy peaks in 2021.

While there was certainly value to be had under 20, but now we are above the market average. This is still less than the sector-specific average, but risks remain with it elevated so much relative to the last six months.

The Trump Trade could run its course, continuing the SQ run up due to the potential for less fintech regulation that affects both SQ itself and BTC, which we’ve established SQ trades in sympathy with.

If this trade goes sour, SQ is likely to be hit and brought back down below the 20 mark. This is a critical juncture that investors must consider when buying SQ stock.

Conclusion

Ultimately, it’s been interesting to see how BTC and SQ decoupled in the severity of their correlation, even if it still remains somewhat intact. Block, Inc. is benefitting from the current market run-up following the election in Bitcoin and fintech stocks somewhat broadly, but may be entering heightened levels that it can’t sustain. This comes even as it grows its business, both in terms of monthly actives and in revenue and profit, at a 20% YoY rate.

The business fundamentals make SQ attractive, but it’s unclear how much of that plays into its share price, given that it trades in sympathy with BTC so consistently. This means that there are risks even if the underlying business looks like quality.

I am rating SQ a hold for now, and encourage those bullish on fintech to consider Block, Inc. in their portfolio, but only for aggressive investors, and only up to a 2% allocation in an all-equities portfolio. This is a position that could catch back up to where it used to be, but it is also one that could stay depressed despite positive signs for the business, especially if Bitcoin crashes following its breach of the $100K mark.

Thanks for reading.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Bitcoin Won’t Help Block This Time appeared first on Up2info.com.

• Block (NYSE: SQ) delivered disappointing 3Q FY2024 results, missing revenue estimates and guiding for a weak margin in 4Q due to delayed cost benefits pushed into FY2025.
• A continued deceleration in GPV growth in 3Q was driven by weather and hurricane impacts but management anticipates a rebound in 4Q, with significant acceleration expected in FY2025.
• I expect YoY growth in gross profit and adjusted operating margin to improve in FY2025, potentially allowing SQ to achieve the Rule of 40 sooner than 2026.
• Trump’s reelection and potential deregulation in fintech, along with Bitcoin exposure, could provide a tailwind for SQ.
• SQ’s valuation remains attractive, with a non-GAAP P/E TTM of 23.8x, driven by 99.4% YoY EPS growth. The forward multiple is expected to drop to 18.2x, supported by 30.5% YoY.

A Mixed 3Q FY2024 Earnings

Block (NYSE:SQ) delivered mixed results for 3Q FY2024, triggering a negative market reaction in after-hours trading. The company missed revenue consensus due to weak gross payment volume (GPV), though its non-GAAP EPS was in-line with expectations. Specifically, GAAP

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Block: Anticipating Gross Profit Rebound And Margin Expansion From Strong GPV Growth In FY2025 appeared first on Up2info.com.

• Block reported decent Q3 ’24 results, driven by Cash App’s strength.
• Block’s EBITDA grew 69% year-over-year, with margins expanding to 36%, supported by Cash App’s momentum and an improved cost structure.
• Shares are attractively valued at 16.7X FY 2025 earnings, making Block a strong buy due to its rapid growth and profitability.
• Block is also expected to grow its EPS significantly faster than PayPal, but the Fintech is trading at the same FY 2025 P/E ratio.
• Risks include potential margin contraction or slowing adoption of Cash App Card, but current trends support a favorable long-term growth outlook.

Block (NYSE:SQ) reported results for its third fiscal quarter that met on earnings, but missed on revenues. Generally, however, Block saw decent Cash App strength and double-digit growth year-over-year in Cash App Card users. The Fintech benefited from continual gross profit momentum in both of its core businesses, and Cash App is now responsible for the majority of Block’s earnings on a gross profit basis. Shares of Block are also very attractively valued, with investors currently paying only 16X FY 2025 earnings for one of the fastest-growing, publicly listed Fintechs. I believe the long-term growth outlook is very favorable, and I continue to rate Block’s shares a strong buy.

Previous rating

I rated Block a strong buy in my August work on the Fintech because of the company’s growth, especially in terms of Cash App-related gross profits: The More It Drops, The More I’ll Buy. In the September quarter, Block continued to improve its profitability profile, due chiefly to Cash App, which resulted in the company reporting drastically higher EBITDA and margins as well. In my opinion, Block has massive potential to grow its gross profits, in both Cash App and Square, and the valuation is very attractive.

Block beats estimates

The Fintech met bottom-line expectations for the third fiscal quarter: Block reported adjusted earnings of $0.88 per-share and had a top line that came in at $5.98B, falling short of the consensus estimate by $280M.

Although Block missed revenue estimates, the Fintech had a solid third quarter that showed 6% top-line growth year-over-year, and the Fintech made considerable progress in terms of growing its gross profits as well. Total consolidated gross profits reached $2.25B, showing 19% year-over-year growth. What stood out from Block’s earnings scorecard yet again was the solid momentum that the Fintech experiences in the Cash App segment. In this business, Block generated 21% year-over-year growth in gross profits, compared to 16% growth in the Square segment. Cash App represented 58% of the company’s total gross profits, and it is here that the company has the momentum. The Cash App segment focuses on instant, digital payments, while Square is a retail-focused point-of-sale system that is chiefly focused on merchants.

Block’s Cash App has considerable momentum and one key driver here in the year has been growing adoption of the company’s Cash App Card, a debit card that can be used to pay for goods and services. It allows users to tap into the Cash App ecosystem, and the Fintech has seen some inspiring growth here in the last year: total Cash App Card users reached 24M in the September quarter, showing 11% year-over-year growth. Growing product up-take of the Cash App Card is a key catalyst here.

Improving profitability profile

Block generated $807M in adjusted EBITDA in the third-quarter, showing massive 69% year-over-year growth. This growth comes from strong momentum in the Cash App ecosystem, higher scale (a larger number of users) compared to the year-earlier period and a better cost structure. Block laid off staff earlier this year in order to improve its profitability profile which is a trend we have seen in the technology industry in general. Block’s operating expenses grew 1% year-over-year in Q3’24 compared to 6% growth in revenues and 19% growth in gross profits, leading to positive operating leverage for the Fintech.

Importantly, Block managed to improve its EBITDA margins by a significant amount in the last year: as of the end of the September quarter, Block expanded its EBITDA margin to 36%, showing an 11 PP year-over-year expansion.

Block’s valuation is offensive

Since Block is solidly profitable, we can use a price-to-earnings approach to valuing the Fintech and its main rivals in the market for instant, digital payments. Block is currently valued at a forward price-to-earnings ratio of 16.7X which puts the Fintech’s valuation multiplier about on the same level as PayPal (PYPL)’s. However, Block is expected to grow its EPS about 3.4X faster than PayPal in the long term, suggesting that the Fintech’s valuation is almost offensively cheap.

In the chart below, I am comparing Block’s, PayPal’s and SoFi Technologies (SOFI)’s forward P/E ratios and long term EPS potential. From a growth perspective, I believe SoFi is by far the most promising investment in the industry group with an estimated long term EPS growth rate of 43%, but this growth is also reflected in a much higher P/E ratio of 49X. I explained recently why I see a long-term fair value of $30 for SoFi’s shares. PayPal is chiefly a capital return play due to its large moat and high, recurring free cash flow.

Block, on the other hand, has the right combination, at least for me, of above-average EPS growth and a moderate price-to-earnings ratio. Trading at just 16.7X forward earnings, the Fintech’s shares are also priced at a 51% discount to the historical average P/E ratio. In my previous coverage I stated that I saw a fair value of $108 per-share for Square due to its strength in both core businesses, but especially in Cash App.

This fair value estimate was based off of a consensus estimate of ~$4.50 and a fair value P/E ratio of 25X, and I believe that Block’s improving EBITDA profile justifies a significant revaluation to the upside. Applying a 25X P/E ratio to the current consensus estimate of $4.49 per-share calculates to a new fair value of $112 per-share, implying 49% upside revaluation potential. Given its strong prospects for EPS growth, especially in the long term, I believe the market underprices Block’s potential for both growth as well as multiplier expansion.

Risks with Block

The biggest risk for Block, as I see it, relates to the Fintech’s gross profit growth in the Cash App segment. It is here that the company has considerable momentum, which in turn backs up Block’s valuation. What would therefore change my mind about Block is if the Fintech were to see slowing product up-take of the Cash App Card or weakening segment top-line growth.

Final thoughts

Block is benefiting from strong EPS and gross profit growth that is driven mainly by Cash App, the Fintech’s crown jewel business that is seeing higher product adoption rates. Cash App Card, which allows customers to tap into the Cash App ecosystem through the use of a debit card, is seeing excellent growth as well. I believe the market is wrong about pricing Block’s shares at about the same P/E ratio as PayPal, as the former is expected to see 3.4X stronger long term EPS growth than PayPal. Shares of Block have considerable long-term revaluation potential… if the Fintech can continue to grow its core business at double-digits, increase Cash App Card usage and enhance its EBITDA margin profile further.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of SQ, PYPL, SOFI either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Block: A Cheap And Solid Fintech Play appeared first on Up2info.com.

• Block plans to publish its Q3 results on the 7th of November after market hours, and we touch upon some of the important sub-plots of the earnings event.
• Valuations look cheap, particularly in light of management’s OPEX control and healthy EBITDA dynamics through the next year.
• SQ, which doesn’t have the greatest earnings track record, has little wiggle room to go wrong as estimates for Q3 have been lifted by 4% over the past 3 months.
• The transition towards the rule of 40 also results in better cash conversion, thus opening the prospect of increased buyback momentum, which could support the share.
• We like the set-up on the charts and think Block could benefit from some mean-reversion.

Introduction

After a healthy 2023 with gains of over 23%, the stock of diversified fintech, Block, Inc. (NYSE:SQ), has proven to be a disappointment of sorts in 2024. On a YTD basis, SQ has wobbled, and is down by close to 7%, underperforming other fintechs (>13%), and the tech-heavy benchmark (>29%).

With around a couple of months to go, before the year draws to a close, SQ still has the time to ameliorate the degree of underperformance and end up with another year of positive returns. One event that could prove to be decisive in this regard is the upcoming Q3 results, due to be announced on the 7th of November, after market hours.

Q3 Earnings – Key Metrics

Even though investors like to focus on revenue trends during earnings season, in Block’s case, the onus will rather be on gross profit growth, which gives a better perspective on the health of the core transactional side of the overall business.

Note that after showing some stabilization between Q4 last year and Q1 this year (at the 22% levels), the group gross profit growth looks set to carry on with its declining trend in Q3. Admittedly, Q2 had to deal with tough comparable of 27% growth a year ago, but in Q3, the year-ago comparables will be a lot more palatable (21%), yet GP growth is expected to come off to levels of 17%, before dropping even further to 13-14% in Q4 (the implied Q4 number is based on management’s FY guide of 18% growth for the whole of FY24).

Having said that, don’t rule out the prospect of management lifting the December quarter GP growth, as transactional-based revenue for the ‘Square’ vertical usually gets a seasonal uplift on account of holiday trends. It’s worth noting that the forward-looking consumer confidence domestic numbers are currently hitting the highest cadence of monthly gains in 3.5 years, and this certainly bodes well for purchasing momentum in this quarter.

Even otherwise, we are rather enthused by management’s plan to bolster Square’s positioning through initiatives such as new centralized sales leadership, and a better self-serve onboarding experience for prospective sellers. SQ’s main target is to capture the mid-market and SMB cohorts, and we believe Q3 would have received a boost from their new onboarding platform (which came to fruition only in July 2024) designed to bring down the onboarding steps from 30 (and over 10 mins) to just 4. Block also plans to introduce a convenient single P-O-S app for its sellers before the close of FY24.

The Cash App side of the business has proven to be more resilient and has been the main driver of gross profit growth. For context, in Q2 it was up by an impressive 23% YoY, and whilst there may be some slight declines, we would still expect the Q3 and Q4 numbers to be trending closer to the 20% levels.

Within Cash App one of the more exciting products to keep an eye on is “Cash App Borrow” which is more like a convenient short-term working capital loan for retail clients (typically $100 and less than 1 month in duration). In Q2, Cash App Borrow saw a tremendous spike of 3x in total originations, highlighting the underlying popularity of this product and also serving as a useful fillip to the monetization rate. Within Cash App, one metric that didn’t fare particularly well was the growth in actives, which was up only by 5% YoY at 57m, but we would expect this to see an uplift in Q3 on account of the June launch of App Card Spending Insights which is designed to give the actives a more comprehensive perspective of their spending patterns, and help them make better financial decisions.

A word also on SQ’S SBC (Stock-based compensation) trends which also take on more prominence, given the weight it has on the company’s operating cash flow (roughly 63% of the H1-24 operating cash flow). In recent periods we’ve seen growth come in at a minimal pace of less than 1%, and we won’t be surprised to witness a YoY decline in Q3-24, given that last year’s SBC spend was quite high by historical standards.

What Does The Medium-Term Outlook And The Valuation Picture Look Like?

One of the other key reasons to turn more constructive on SQ is its ongoing efforts in cleaning up the expense base, which will help it engender better operating leverage over time and facilitate much healthier EBITDA growth. At the Goldman Sachs conference a couple of months back, the CFO has been on record stating that they’ve implemented a workforce cap of 12000 employees (meanwhile, reports last week suggest that the TIDAL workforce will be cut by one-fourth), even as efficiencies continue to be pursued in other areas such as real estate, software, cloud fees, etc.

For the uninitiated, SQ has a goal of hitting the rule of 40 (the aggregate of gross profit growth + adjusted EBIT margin) by 2026, but don’t be surprised to see it get there ahead of schedule. If we may refresh investors’ minds, during the Q2 event, SQ had already lifted its FY24 target from the previous levels of 32% (GP growth+ adjusted EBIT margin) to 35%. Having said that, H2 operating leverage may not necessarily be as strong as H1 given a likely ramp up in marketing spend across new channels.

Nonetheless, if we take a broader perspective, and look at consensus estimates for this year and next year, and take last year’s adjusted EBITDA of $1792m as the base, it looks like we have a business poised to facilitate resilient EBITDA CAGR of 42% over the next two years.

For that cadence of EBITDA growth, we think a forward EV/EBITDA multiple of less than 14x comes across as very attractive, more so as it translates to a +50% discount over the stock’s long-term average! In addition to these cheap valuations, investors should also note that the company is carrying over 8200 bitcoins on its balance sheet with a fair market value equating to roughly $0.5bn (as of H1).

Risks

With regard to the Q3 event, investors may want to note that expectations have been dialed up, leaving it little wiggle room to go wrong. To elaborate, note that both EBITDA and EPS estimates for this quarter have already been lifted by roughly 4% over the past 3 months. What also makes things slightly trickier is that Block doesn’t necessarily have the most pristine track record when it comes to meeting bottom line estimates. For context, over the last 3 years, around 25% of the time, Block has failed to meet quarterly EPS estimates.

It’s also fair to say that the SQ stock isn’t meant for the faint-hearted, particularly on account of its heightened exposure to the crypto markets (as of H1-24, bitcoin-related revenue accounted for 44% of the total group revenue) which can be quite mercurial. We’d like to think that his facet has played an important part in SQ having an inordinately high beta of over 4x. With uncertainty around the Presidential elections, high beta stocks like SQ may not necessarily be the most opportune bet at this juncture.

Closing Thoughts – Is Block A Good Buy Now?

Besides the alluring EBITDA and valuation sub-plots, here are a few other reasons why we are more sanguine on the stock’s prospects.

Firstly, SQ’s monthly chart which captures the price movements over the last two and a half years suggest that it has been forming something similar to an ascending triangle pattern which is innately a breakout pattern characterised by a flat resistance and higher lows. Note that the price is yet to reach the potential breakout/resistance zone (the upper black line), so it gives prospective investors some elbow room to not get trapped right at the top (if the breakout fails to materialize).

Then, if one drills down to the lower time frame daily chart, it appears that SQ has been forming a bull flag since the turn of October, with the second leg of the pullback currently underway. Meanwhile, it is also encouraging to note that the stock is trading above its 50 and 200 DMAs with a potential golden cross catalyst on the anvil.

Investors may also be interested to note that the trend seen since the September lows has also been supported by the institutional segment (which reflects well on the quality of the trend).

The stock will also likely get further support from a ramp-up in buyback momentum. As SQ gets closer to the Rule of 40 target, what you’ll also see is a much higher of cash conversion (Adjusted EBITDA to FCF conversion as of H1-24 had hit levels of 57%, up by a mammoth 1300 bps YoY) with operating cash flow (OCF) per quarter already at record highs of over $500m. Nonetheless, as OCF numbers orbit around a higher threshold, one can expect SQ’s buyback appetite to also keep pace. At the end of H1, SQ still had around $3.2bn worth of buyback ammunition due to be spent (representing 7% of the market-cap)

Meanwhile, if you’re big on the conception of mean-reversion in the markets like we are, then you’d like to know that the SQ stock represents one of the promising bets for those covering the Nasdaq. As things stand, the current relative strength of Block over the Nasdaq is roughly only half as much as its long-term average, offering some scope for normalization.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Block Appears To Be An Intriguing Bet Ahead Of Q3 Earnings Event appeared first on Up2info.com.

• Block, Inc. faces intense competition and lacks clear leadership in the fintech sector, with limited synergy between its Cash App and Square segments.
• Recent strategic changes, including appointing Nick Molnar and new partnerships, show promise but require more evidence of success.
• With a fair value estimate of $64 per share, I remain cautious and await clearer strategic execution before re-rating Block higher.

Overview

Investors haven’t especially valued the Fintech industry highly in the last three years. Companies like Robinhood (HOOD), representing B2C competition, Shopify (SHOP), B2B competition, and Block (NYSE:SQ) which unites both markets, have lagged behind the S&P 500 and banks like JPMorgan (JPM), as seen in Figure 1. Block doesn’t stand as a clear leader for investors. I myself know a lot of reasons to be on this side. Although I recognize that the company is doing some good things lately.

In the second quarter of 2024, the company’s gross profit increased by 20% compared to the previous year, reaching $2.23 billion. The company processed $61.94 billion in GPV, which is up 5% year over year. However, gross profit from these transactions was 1.15% of the total GPV, slightly down about one percentage point. Subscriptions and services have performed better, and that is important because those services imply a stronger relationship between the company and its customers. Its gross profit was roughly $1.5 billion, an increase of 27% year-over-year.

Block is a complicated business

Block is a collection of businesses that offer an array of complex services. It serves several industries and customer segments and is among the most complicated companies in the financial sector. Initially seen as a payment company, it now functions as a banking company through lending and deposit services. On its platform, you can buy or sell cryptocurrencies and more conventional securities, such as equities. Block operates in both business and consumer segments, offering tools for small businesses through Square and financial services for individuals via Cash App. While this approach helps Block diversify its revenue, it also creates problems managing such a complex organization with no recognized synergies.

Block’s acquisition of TIDAL, a music streaming platform, was seen as a strange move. I view it as a distraction from its core financial and payment services. Integrating TIDAL into Block’s ecosystem is hard due to disparate business approaches, adding complexity.

CashApp

Cash App is the most prominent segment. The app posted a 23% increase in gross profit in the second quarter, with a gross profit of $1.3 billion and more than half of the company’s total profits. One of the features driving this growth is Cash App Borrow, a loan product that saw originations rise to $2 billion—almost three times higher than the previous year. While Cash App is clearly Block’s key growth driver, the company faces increasing competition in fintech.

CashApp is one of the contenders in the BNPL (Buy Now, Pay Later) market and is doing well, but not well enough in my view. GMV was $7.75 billion, increasing 21% year over year. However, it falls short of 32% growth to $7.5 billion in GMV for Affirm.

To grasp the evolution of CashApp, we can compare it with Robinhood, which was created at the same time (April 2013). CashApp has been growing at a faster pace. CashApp has 24 million active users, up from 21 million a year ago. 43% are active monthly users when there were 39% a year ago. We can estimate that Robinhood activity could be smaller because it has, as of Q2 2024, 24.2 million funded customers and 24.8 million investment accounts with no active users available. Net revenue for CashApp was $4.1 billion as of 2Q2024 and $682 million in the same period for Robinhood.

Despite these results, the market doesn’t value Block like Robinhood or even Affirm, expecting a greater growth potential from the latter companies (Figure 2).

Square

Square, Block’s original business serving sellers, hasn’t been so popular, but it still performed well. Square’s gross profit increased 15% to $923 million, driven by a steady 8% rise in Gross Payment Volume to $58.37 billion. While Square’s growth is behind CashApp’s, it remains a solid contributor thanks to its expanding portfolio of banking and software products. Its international GPV grew 19%, showing Square’s potential beyond U.S. borders.

Banking has been a particularly growing area. Notably, it is a shared service with CashApp. Gross profit in banking services has grown by 27% yearly, especially on loans. The company has facilitated 142,000 loans totaling $1.45 billion in originations, up 32% year over year.

Shopify, one of its competitors, for instance, has a size similar to Square at $2 billion in revenue, which is equivalent to gross profit in Square but growing at a faster pace (21% vs 15%). The operating margin is slightly better at Square (Figure 3).

But, again, the market is assigning a higher multiple to Shopify (Figure 4). Apparently, there is room for an increase in the multiple for Block. For that, the company should build clear interactions between CashApp and Square to improve both operations; otherwise, it is better to segregate them. I think Block doesn’t show a clear value proposition for a diversified investor and doesn’t grab enough attention.

Changes in the right direction

In the last earnings call, management announced several changes. The first and most important is appointing Nick Molnar, CEO and co-founder of Afterpay, as responsible for the sales function across the company, including CashApp and Square. This change seeks to integrate both segments into a coordinated sales function. I am confident that he will find mutual benefit in both businesses.

New partnerships with US Foods, which will reach 40% of the restaurants in the US, and international bank agreements will speed up the company and go in the same direction as the integration of the sales function. This is a clear sign that competition is intensifying, and Block is sensitive to it.

Marketing rationalization with fewer verticals and campaigns and marketing integration with the sales function are steps further to gain speed. The company’s commitment to add more investment intensifies that.

Those changes go in the right direction, but I shouldn’t assume they will succeed until more data shows progress. So, I keep a cautious stance.

Valuation

Figure 5 shows the company’s value drivers, considering a year as the last four quarters to capture the latest information. Regarding margins, I utilize a measure I call Cash Margin, which involves adjusting net income for non-cash items such as amortization and depreciation, stock-based compensation, and deferred income tax.

As I have outlined in previous sections, Block is a complicated business, and in my projections, I reflect this uncertainty with conservative assumptions. I estimate revenue will keep growing but at a slightly lower growth rate each year due to the increase in the baseline. I can’t foresee any clear evolution in cash margins, so I assume the same 10% margin over the whole period.

Cash flows will be discounted at a 12.3% WACC because the beta is 2.49. The risk-free rate is 3.8%. The company’s leverage is 24% of total capital, and the terminal growth rate is 3%.

As shown in Figure 6, my value estimate is $64 per share, an 8% downside from its current stock price. It has no significant downside margin, so I don’t consider it a sell situation. I prefer to be cautious and see more evidence of the company’s evolution, especially with the new changes.

Risks

Block operates in an intensely competitive market with companies offering similar services, such as Robinhood, PayPal, Stripe, and Shopify. This competition could press margins down or make customer acquisition more expensive.

Robinhood spends 36% on research and development, Affirm spends 22%, and Block 12%. Affirm spends 25% on sales and marketing, much higher than 8% in Block. Shopify spends 17% on research and development and 17% on sales and marketing. Those numbers reflect that competitors are investing more in product and marketing, and if this continues, Block will lose market share. Again, I am cautious because there is much uncertainty about who will be the leaders in those markets.

A recession could seriously impact Square because it serves small and medium-sized businesses (SMBs) very sensitive to macroeconomic headwinds. If consumer spending drops, these businesses will need fewer services like payment processing, and their credit quality for loans will deteriorate. Fewer transactions directly mean less revenue for Square. While a downturn isn’t certain, the hit to SMBs—and Square—could be significant if it does happen.

Conclusion

Block, Inc. presents, in my opinion, a complicated investment case. Its business ranges from payments to banking and cryptocurrency, serving consumers and small businesses. Cash App is growing fast, contributing more than half of Block’s gross profit, and Square’s steady performance goes in the right direction, but there’s limited synergy between these segments. This lack of cohesion and distractions like TIDAL leave me cautious about fully valuing the company’s potential.

My valuation reflects this complexity. With a fair value estimate of $64 per share and a minimal margin above its current stock price, I await more evidence about the management’s changes.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Block: Too Complex To Unveil Its True Value appeared first on Up2info.com.

• Block has an estimated ~$75 billion gross profit opportunity in the U.S. market from P2P transactions, financial services, and Bitcoin trading.
• Cash App’s monetization includes $29 billion from P2P transactions, $45 billion from financial services, and $3 billion from Bitcoin.
• In Q2 2024, Cash App had 57 million monthly active users, with an average inflow per user of $1,243.
• Bitcoin trading contributed 63.3% of Cash App’s Q2 2024 revenue, highlighting exposure to cryptocurrency market volatility.
• Block’s withdrawal from the U.K. signals a U.S.-focused strategy, raising global scalability and growth concerns.

Investment Thesis

Block’s (NYSE:SQ) Cash App ecosystem can capitalize on a ~$75 billion addressable market potential at an epicenter of P2P transactions, financial services, and Bitcoin trading in the US. Cash App is positioned for growth on the back of 57 million active users and increasing monetization. However, Block remains inextricably linked to Bitcoin (BTC-USD) revenue in Q2 2024 with 63.3%; therefore, revenue would be susceptible to market fluctuations. Its recent withdrawal from the UK raises questions about international scalability.

Despite these challenges, Cash App’s diverse revenue streams, large user base, and ongoing cost-cutting efforts position it for continued growth, supporting the buy rating.

Bullish Catalyst: Growth Of Cash App Ecosystem

Block’s Cash App ecosystem creates a strong growth fundamental, representing a strong bottom-line opportunity based on the US addressable market. Notably, this indicates an opportunity in the US market of ~$75 billion total, derived from three primary sources: at a P2P transaction level, financial services, and Bitcoin trading. It is estimated that the first part of Cash App’s gross profit opportunity is $29 billion, emanating from P2P transactions and business accounts. Block monetizes these with fees mainly for instant deposits, which grow with increased adoption. Financial services represent an even larger opportunity, at roughly $45 billion, accounting for the projected gross profit.

Technically, a Cash App card allows spending on a Cash App balance, like a debit card, bringing more inflows and monetizing avenues to Block. In addition, another $3 billion extra gross profit came in due to the fraction brought forth by Bitcoin trades. One of the most popular features of the Cash App is its ability to let its users transact and hold Bitcoin. This has gained immense popularity with the rising inclination towards cryptocurrencies. Far from it, Bitcoin trading has gone so far as to differentiate Cash App, further improving user engagement and making the top line of the app more diversified.

Cash App had 57 million monthly active users in Q2 2024, with an average inflow per user of $1,243 and a monetization rate of 1.53%, which would put its gross profit at $1.079 billion for the quarter. These numbers indicate the platform’s strong capability to acquire and retain users by effectively monetizing their activity.

The monetization rate indicates that Cash App has moved from being purely transactional to high revenue with value-added services. The multiplier of by-product inflows or actives suggests the various products and how they contribute to inflows at Cash App. For pure P2P users, base level-1X Inflows significantly increase for users who adopt additional products. For example, there are 7X and 2.3X inflow multipliers for direct deposits and Cash App cards, respectively.

Moreover, Block’s Cash App growth potential is pointed out by its capability to attract digital-native users. These are particularly Generation Z and Millennials, representing a considerable portion (~73%-75%) of Cash App’s user base. Specifically, Generation Z represents ~56 million individuals (aged 13-25) with a mean income of $39K. Generation Z has the highest monthly active user (“MAU”) engagement at 38%, accounting for 28% of total inflows. This is a critical element for growth, as younger consumers are often more inclined to adopt new digital services.

Furthermore, the largest demographic segment, at 72 million people, Millennials (aged 26-41), has a higher mean income of $85K. They reflect 35% of Cash App’s monthly activities and 42% of total inflows, indicating a high level of engagement and spending through the platform. The higher inflows among Millennials also suggest that this group is more likely to adopt Cash App’s financial services (like Cash App card or Bitcoin trading), further boosting profitability.

Moreover, Generation X (aged 42-57) and Baby Boomers (aged 58-76) have higher mean incomes ($113K and $79K). However, their engagement with Cash App is lower, with Generation X making up 19% of monthly actives and 22% of inflows, and Baby Boomers hold just 8% in both categories. While these demographics represent a smaller portion of Block’s user base, they still offer untapped potential. How? Cash App may progressively expand its product offerings to have more older-wealthier users.

Looking ahead, Block’s Cash App guidance for 2024 reflects continued growth. Cash App may derive strong gross profit growth in H2 2024, with growth in line with the second quarter’s 23%, as the company captures the benefit from improvements in structural costs in H2. As a result of operational edge, the normalized income is moving in line with gross profit, making Block stock undervalued relative to historical PE ratio levels.

High Level Of Bitcoin Revenue Dependency

A fundamental issue for Block lies in its heavy reliance on Bitcoin revenue, which exposes it to volatile cryptocurrency markets. Although the company’s non-Bitcoin business has improved, the reliance on Bitcoin may significantly skew long-term growth. For instance, Cash App revenue, excluding Bitcoin, stood at $1.52 billion in Q2 2024, with an 18.3% annual increase. Meanwhile, Bitcoin revenue added $2.61 billion to the Cash App revenue line, making cryptocurrency-based revenue 63.3% of total Cash App revenue. This points to how Block’s growth hinges on Bitcoin sales through Cash App.

Gross profit from Bitcoin, which rose 52% in Q2 2024 versus Q2 2023, mostly reflects price action from late 2023 that increased the market price of Bitcoin given and granted. Investors might think 52% growth sounds exciting, but it masks an underlying issue. Bitcoin’s profitability highly depends on external factors beyond Block’s control, such as crypto market sentiment and pricing volatility. The company also held ~8,211 Bitcoins for investment on its books in Q2 2024, valued at $515 million.

While this might initially seem like a sound investment, Block had a remeasurement loss of $70 million on its Bitcoin holdings in Q2. This further highlights the risk inherent in relying on cryptocurrency, especially for GAAP numbers. This negative impact on net income may hurt the company’s bottom-line growth, as ongoing remeasurement losses based on Bitcoin’s volatility could further erode profits.

Another downside that could impede Block’s Cash App growth is its decision to discontinue its operations in the UK as of September 2024. This marks a strategic retreat from international markets to focus on the US. Block’s decision is part of a broader plan to concentrate on growing its domestic market rather than pursuing global expansion.

The intention to focus on US consumers earning up to $150K per year and positioning Cash App as a merchant banker marks a reliance on a relatively narrow customer base, conveying a contraction in geographic diversification. This is generally a sign of fundamental weakness for a fintech company. Exiting the UK signals problems in Cash App’s scalability and profitability outside the US, raising concerns about its potential for growth in other international markets. The UK withdrawal also points to the intense competition Block is facing in P2P payments from rivals like PayPal (PYPL), Venmo, and Zelle. By exiting this market, Block is ceding ground to competitors to hit its domestic market share, which may further limit Cash App’s ability to derive growth.

Overall, Jack Dorsey’s return as CEO in 2023 marked a shift towards cost-cutting moves and strategic refocusing. That signals Block is tightening its operations against macro and financial pressures. While the strategy may improve the bottom line in the short term, it also stifles the longer-term growth potential by limiting its international reach and reducing its ability to capitalize on fintech market opportunities. By concentrating on the US market, Block risks missing out on fintech growth in emerging markets, where digital payment adoption is gaining massive traction.

Takeaway

Cash App is well-positioned for future profitability with a growing user base of 57 million monthly active users and diverse revenue streams. However, the company faces challenges, such as heavy reliance on Bitcoin revenue and withdrawal from international markets, which may affect long-term growth. Overall, Cash App’s increasing monetization rates and engagement with younger demographics make it a promising driver of Block’s market expansion.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of PYPL either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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• Block’s Q2 2024 performance exceeded expectations, with gross profit growing 20% YoY to $2.23 billion and adjusted EBITDA up 81% YoY to $759 million.
• Strong growth in Cash App and Square segments, driven by Cash App Card, Cash App Borrow, Afterpay, and Square Loans, bolstered overall performance.
• Block raised FY24 guidance, projecting adjusted EPS of $3.74 and gross profit of $8.65 billion, with further growth expected from BNPL integration and expanded financial services.
• Revised EPS projections for 2024-2026 and a lower cost of equity lead to a new target price of $112, reflecting Block’s improving profitability and growth potential.

Block’s (NYSE:SQ) commercial momentum is beating expectations: During Q2, the company managed to score a 20% YoY growth in gross profit, and an 81% YoY jump in adjusted EBITDA. Moreover, following strong results, Block raised its FY24 guidance, projecting a 15% YoY increase in gross profit to $8.65 billion

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Not financial advice

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Block: Booming Momentum On Structural Growth Upside appeared first on Up2info.com.

• Block’s slowing GPV growth and volatile Bitcoin investment have contributed to the stock’s underperformance compared to its fintech peers.
• This is despite the bottom-line beat FQ2’24 earnings call and raised FY2024 guidance, triggering the promising consensus forward estimates.
• Despite the near-term uncertainty from its ongoing reversal, we maintain our long-term optimism surrounding SQ’s prospects, as observed in the highly sticky Cash App/SaaS offerings.
• This is on top of the cheap PEG non-GAAP ratio and the double-digit capital appreciation prospects over the next few years.
• Even so, we shall discuss why SQ’s love story with Bitcoin may trigger H2’24 uncertainty.

SQ’s Bitcoin Thesis Dilutes Its Fintech Performance

We previously covered Block (NYSE:SQ) in July 2024, discussing the stock’s underperformance despite the double beat FQ1’24 earnings results and raised FY2024 guidance, with the stock’s FWD valuations also consistently moderated compared to their 1Y and pre-pandemic means.

Perhaps part of the headwinds might be attributed to the management’s intensified investments in bitcoins, a development that might trigger its further underperformance until the market was convinced about the fintech’s prospects along with bitcoins’ appreciation potential.

SQ YTD Stock Price

Since then, SQ has lost -11.7% of its value compared to the wider market at -4%, as the management reported a mixed FQ2’24 performance worsened by the tumbling Bitcoin prices by -11.4%.

The stock’s underperformance compared to the wider market and its fintech peers is unsurprising indeed, given that the fintech has shown signs of decelerating YoY growth across most of its Gross Payment Volumes [GPV], with the discounted stock prices/valuations warranted until the management is able to drive new growth opportunities.

Based on these developments, it appears that SQ may be losing ground as SoFi (SOFI) and PayPal (PYPL) continue to report improved performances in the latest earnings call on a QoQ/YoY basis.

This is especially since the former’s Bitcoin ambitions has pulled down its overall performance – with the fintech segment’s growing net revenues of $3.53B (+9.6% QoQ/+12.7% YoY) moderated by the underwhelming Bitcoin revenues of $2.61B (-4.3% QoQ/+9.2% YoY) in FQ2’24.

The QoQ/YoY decline in SQ’s bitcoin revenues is unsurprising indeed, given the halving event in April 2024 and the ongoing consolidation before the supposed “significant rally” in 2025.

Even so, with the company also reporting a higher Bitcoin volume of 8,211 (+2.1% QoQ/NA YoY) worth $514.58M (-10.2% QoQ/+133.9% YoY) held for investment purposes, it is unsurprising that market sentiments surrounding its prospects have also been impacted.

This is despite SQ’s growing fintech subscription and services-based revenues to $1.78B (+5.9% QoQ/+21.9% YoY) in FQ2’24, with it underscoring the growing stickiness of its Cash App platform at $1.42B (+6.7% QoQ/+37.8% YoY) and to a lesser extent, Square platform at $323M (+9.1% QoQ/-15.2% YoY).

With the subscription and services-based segment being the clear bottom-line driver at increasingly rich gross profit margins of 83.6% (-0.3 points QoQ/+2.8 YoY), it is unsurprising that the fintech has reported a bottom-line beat in the FQ2’24 earnings call, despite the top-line miss.

Despite SQ’s uncertain GPV growth, readers must note that Cash App (including Card, Borrow, and BNPL offerings) continues to report robust growth in inflows per active users at $1,243 (-1% QoQ/+9.6% YoY) and active users to 57M (in line QoQ/+3M YoY).

This is on top of the increasing Cash App Card monthly actives to 24M (in line QoQ/+13% YoY) and over $2B in loan originations in Cash App Borrow (nearly 3x YoY), with it implying the management’s early success in expanding its Cash App ecosystem beyond the P2P payment/digital wallet platform.

At the same time, the management has taken great steps to drive GPV growth, by tapping into Nick Molnar, CEO and co-founder of Afterpay, as a leader of centralized sales function in an effort to “reinvent sales at its payment terminal company Square after slowing growth” while looking to launch new partnerships and intensify their high return marketing efforts.

As a direct result of their confidence in its future reversal, SQ has already raised its FY2024 adj EBITDA guidance to $2.9B at the midpoint (+62% YoY), up from the original guidance of at least $2.63B (+46.9% YoY) offered in the FQ4’23 earnings call.

This is on top of the raised Rule of 40 target of up to 35% in 2024 (+6 points YoY) up from the original guidance of 28% (-1 point YoY) and reiterated target of 40% by 2026.

These numbers do not appear to be overly aggressive as well, based on adj EBITDA of $1.46B (+94.6% YoY) and Rule of 40 at 38.6% in H1’24 (based on +20.6% YoY growth in gross profit and 18% in adj operating margin), with the management seemingly well on track to delivering the raised FY2024 guidance.

The Consensus Forward Estimates

As a result, it is unsurprising that the consensus has raised their forward estimates, with SQ expected to generate an accelerated top/bottom-line growth at a CAGR of +11.6%/+36.4% through FY2026.

This is compared to the previous estimates of +11.8%/+18.3%, while building upon the historical growth of +67.7%/+53.1% between FY2017 and FY2023, respectively.

SQ Valuations

As a result of the accelerated bottom-line growth prospects, we believe that SQ remains cheap at FWD non-GAAP P/E valuations of 17.30x compared to the relatively lower sector median of 11.49x.

This is attributed to the former’s cheap FWD PEG non-GAAP ratio of 0.42x compared to the sector median of 1.24x and its profitable fintech peers, including SOFI at 0.71x and PYPL at 1.21x.

As a result of its highly profitable fintech business, we maintain our belief that SQ has been overly discounted at current levels, with it offering interested investors the opportunistic chance of capital appreciation.

So, Is SQ Stock A Buy, Sell, or Hold?

SQ 3Y Stock Price

For now, SQ has been unable to retain most of its recent gains, while currently trading below its 50/100/200 day moving averages and retesting its support levels of $60s.

We had previously offered a fair value estimate of $40.20, based on the FWD non-GAAP P/E valuations of 22.35x and its FY2023 adj EPS of $1.80. This is on top of the long-term price target of $123.80, based on the consensus FY2026 adj EPS estimates of $5.54.

Based on the LTM adj EPS of $2.78 ending FQ2’24 and the moderated FWD non-GAAP P/E valuations of 17.30x, we are looking at an updated fair value estimate of $48.10. Based on the consensus raised FY2026 adj EPS estimates of $5.68, we are looking at an updated (and lower) long-term price target of $98.30.

The downgrade is not overly bearish as well, as observed in SQ’s sideways trading pattern since May 2022 and the GPV underperformance compared to its peers.

Even so, we are reiterating our Buy rating here, attributed to its cheap PEG non-GAAP ratio and the still excellent upside potential of +60.5% to our updated long-term price target. This is on top of the fintech’s highly sticky Cash App offerings and accelerated profitability thus far.

Risk Warning

It goes without saying that SQ’s conviction/love story with Bitcoins may trigger more volatility in the near. Analysts already expect Bitcoin to potentially dip to $45K after the Fed (supposedly) pivots by 25 basis points in the upcoming FOMC meeting in September 2024, with it implying a downside of -39% from current levels of $74K.

The same volatility has also been observed in another Bitcoin proxy stock, MicroStrategy (MSTR), with it remaining to be seen when the cryptocurrency may break out of the all-time H1’24 resistance levels of over $90K, significantly destabilized by the ongoing US elections and the volatile geopolitical issues in Ukraine and Gaza.

As a result, we believe that SQ is only suitable for investors with higher risk tolerance, since things may get much worse before eventually getting better.

Patience may be more prudent for now.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The analysis is provided exclusively for informational purposes and should not be considered professional investment advice. Before investing, please conduct personal in-depth research and utmost due diligence, as there are many risks associated with the trade, including capital loss.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Block’s Bitcoin Thesis Dilutes Its Fintech Performance appeared first on Up2info.com.