Square’s name change to To block (SQ -4.21%) radically changed the corporate narrative. Once considered a pure fintech stock, it has turned to music streaming with Tidal and built a cryptocurrency ecosystem that makes it look more like a conglomerate.
As a result, Block’s performance approached that of Bitcoin (CRYPTO: BTC), reinforcing the perception that it is a different company. Still, a closer look at the company indicates that Block remains primarily Square and Cash App, and, at least for now, investors have little reason to consider its other businesses when evaluating the stock.
Block Stock: Perception vs. Reality
The state of the block stock has changed dramatically in a year. Last September, Block (still known as Square at the time) sold for over $250 per share. Additionally, Jack Dorsey managed both Block and Twitterand Bitcoin was in a bull market.
Beginning in late November, Dorsey dedicated himself to the business full-time, which led to the rebranding and focus on its Bitcoin-based segments, the Bitcoin advancement company Spiral, and the platform. -TBD web form. Dorsey even predicted that Bitcoin would replace sovereign currencies.
Block and Bitcoin then lost most of their value. Granted, most tech stocks have fallen, so you can’t blame Block’s decline on Dorsey’s predictions. Still, the company’s fortunes seem tied to Bitcoin. Since Dorsey became the full-time Block Head, Block’s stock is down 65%, while Bitcoin is down 62%.
Unfortunately for Block shareholders, the stock may have fallen victim to a misperception. Technically, Bitcoin accounted for $3.5 billion of Block’s $8.4 billion in revenue in the first half of 2022. However, since the company transacts in the cryptocurrency, most of that “revenue” would be considered as a payment volume if the accounting rules differed. After subtracting the costs of Bitcoin, the actual revenue from Bitcoin is only around $85 million in the first six months of the year, about 3% of gross profits.
The Square and Cash App ecosystems
So, instead of worrying about Bitcoin, investors in Block should judge the company based on the Square and Cash App ecosystems, which still account for almost all of the company’s revenue. Cash App is a social payments platform that supports user spending, deposits and investments. Cash App also paved the way for Bitcoin trading on its platform when it started trading the cryptocurrency in 2018. With this feature, it has 47 million monthly active users and beat PayPal‘s Venmo for number of downloads on Apple‘s iPhone, according to MobileAction.
The Square segment has also built a thriving niche with businesses. The platform can meet almost any financial need of a business. This includes transactions, payroll, inventory, point of sale, and loans. In the United States, where it opened an industrial bank, Square can also manage a company’s checking and savings accounts.
Additionally, it moves around the developed world and currently operates in eight countries. Given that three of the countries are part of the EU, this move could mean relatively easy travel to the 24 EU countries it does not yet serve. Additionally, only $146 million of its gross profit for the first two quarters (about 5%) came from outside the United States, meaning its non-US markets have significant growth potential.
Block inventory status
Overall, Block reported gross profit of approximately $2.8 billion in the first two quarters of 2022, up 31% year-over-year. Yet operating expenses rose 68% during this period, resulting in a loss of $417 million in the first half. Block earned $243 million in the same period a year ago.
Block’s investments in his business could ease concerns about a return to losses. This is crucial, as investors have shown less leeway for companies losing money in this bear market.
Another consideration is an expensive valuation, as its price to free cash flow ratio of 70 makes it considerably more expensive than PayPal at 22 times free cash flow. Nonetheless, the aforementioned 31% gross margin growth for the first half of 2022 could help make Block a buy in this bear market due to its still rapid growth.
Granted, Bitcoin, Tidal, and other parts of Block may become a larger share of gross profits over time. However, given the bright future of the Square ecosystem and the Cash app, Block stock could make a massive comeback with or without its new segments.
Will Healy holds positions at Block, Inc. and PayPal Holdings. The Motley Fool holds and recommends Apple, Bitcoin, Block, Inc., PayPal Holdings, and Twitter. The Motley Fool recommends the following options: long calls $120 in March 2023 on Apple and short calls $130 in March 2023 on Apple. The Motley Fool has a disclosure policy.