Block (SQ -0.35%) was once a hot fintech disruptor, with an innovative platform that captured market attention and skyrocketed. Alas, it has since fallen flat and is now about 76% off of its all-time highs.
It's made some progress turning itself around during the past year, though, and it could start climbing soon. Should you buy it while it's still below $70 per share?
What investors love about Block
Block still has the same innovative spirit that drives its product development and creates real, useful solutions for clients. What started out as a hardware company for small businesses now offers a huge array of products and services -- in fact an entire fintech ecosystem, for businesses of varied sizes. It consistently upgrades the platform with new features that make it easier for businesses to manage what could be tedious and frustrating tasks.
It also has its Cash App personal finance app that accomplishes similar functions for individuals, with all sorts of financial services connected and easy to manage.
One thing Block has been consistent about is growth. It's been reliable for steady revenue increases during the past few years, including 11% year over year in the 2024 second quarter.
Cash App accounts for the majority of revenue at $4.13 billion, and also growth, which was 12%. The seller business's revenue was $1.98 billion, up 9% year over year.
What to watch out for
There have been several issues plaguing Block during the past few years. One is Chief Executive Officer Jack Dorsey's obsession with Bitcoin. Block has spent millions of dollars on Bitcoin, and as a result Bitcoin's fluctuations have an outsized impact on the company's financial performance. Without Bitcoin trading, which Block reports as revenue, Cash App revenue increased 18% year over year, and total revenue increased 13%.
In this quarter, Bitcoin had a negative impact. In other quarters, it's been positive. Either way, it influences the company's financials more than I'd like.
Another concern is that Block's growth hasn't been supported by profits. Profitability fell off a cliff as Block scaled, and management has been reining in expenses recently. However, it's still not what you'd want to see from an asset-light company.
For example, consider Block's performance in comparison with competitor PayPal. Also note that investors have considered PayPal's results to be under par.
SQ Gross Profit Margin (Quarterly) data by YCharts
PayPal is, and has been, in a much better position than Block. In the past, investors were OK with that because Block was perceived as the innovator, with great potential. However, for too long it hasn't been able to realize that potential. That might be changing now.
In the most recent shareholder letter, Dorsey said Block is going to pick up its marketing efforts. That was a bit alarming to me because it's important for Block to run a tight ship.
Is Block stock a good value?
You probably won't be surprised to hear that I find Block to be a risky play right now. It's extremely cheap, trading at 1.8 times trailing-12-month sales and 15 times forward-one-year earnings.
But it's cheap because the market isn't thrilled about it today, and investors have to be concerned that this could be a value trap.
Block has a popular, growing platform, and profitability is improving. Management knows that it has to more carefully balance expenses as it scales, and in a few years, it could be in a much better place. I would say that at the current price, Block stock is a cautious buy for risk-tolerant investors who have a long time horizon.
