Investors are likely familiar with Block(NYSE: SQ), the budding payments and technology enterprise. It caters to merchants with its Square platform, while Cash App targets individuals.
Growth has been outstanding historically, but the fintech stock hasn't panned out as hoped. It's up just 49% in the past five years and currently trades 65% below its peak from August 2021. This is despite shares rising 58% in the past four months.
Investors looking to invest in Block while it's still down should know these three things first.
1. Growth strategy
I just highlighted how superb Block's growth has been. In the three-month period that ended Sept. 30, the company generated more than $2.2 billion in gross profit, which was up 19% year over year. That key performance metric was double that of the same period three years ago. Clearly, the business is doing a great job serving existing customers and finding new ones.
An important part of Block's strategy is to continuously introduce product enhancements and improved features. Recently, the company launched an AI tool that improves the merchant onboarding experience. Additionally, the buy now, pay later service Afterpay is going to be available to use as part of the Cash App Card. It's all about finding ways to better meet the various financial needs of its user base.
The leadership team believes that Block has barely scratched the surface of its total addressable market. They forecast that Square's gross profit opportunity is $130 billion, while Cash App's is smaller at $75 billion. This leaves plenty of runway for business growth over time.
2. Driving efficiencies
As is true of any fast-growing tech-focused business, Block's strategy, as I just discussed above, has been to invest aggressively in product development and sales and marketing in an effort to drive customer additions as rapidly as possible. Patient investors would then start to see soaring profits far into the future.
The tighter macro backdrop of 2022 and 2023, namely around higher interest rates, changed that plan. Many companies started to right-size their operations in order to increase operational efficiencies and start becoming financially sound. Block is making huge progress in this regard.
At the end of 2023, management had successfully gotten the employee headcount below 12,000 workers, a goal that was stated at the end of Q3 2023. "This constraint forces us to prioritize more impactful work, which we believe will lead to growth," founder and CEO Jack Dorsey wrote in the Q4 2023 letter.
This focus on expense controls explains why Block's adjusted operating income in 2024 is expected to total just under $1.6 billion, which would be up 344% year over year. In the following two years, consensus analyst estimates predict operating income will rise at a stellar annual pace of 51%.
Scaled payment platforms can be incredibly profitable. Just look at PayPal, Visa, and Mastercard. Block can also be viewed as a software provider, a business model that is also known to generate strong earnings as revenue increases. Investors should pay attention to make sure Block's bottom line heads in this direction.
3. Block and Bitcoin
Jack Dorsey is a big Bitcoin bull. He believes the world's most valuable cryptocurrency will be the native currency of the internet, a perspective that is strengthened with the rise of AI.
Not only does Block own $530 million worth of Bitcoin on the balance sheet (as of Sept. 30), but it's also working on Bitcoin projects in order to boost the adoption of the crypto. The company has developed a hardware wallet, mining equipment, and financial services to make it easier to transact with Bitcoin.
Consequently, investors looking to buy Block shares on the dip should probably also be optimistic about Bitcoin's long-term trajectory since the digital asset is shaping up to be a more important part of the overall business.
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin, Block, Mastercard, PayPal, and Visa. The Motley Fool recommends the following options: long January 2025 $370 calls on Mastercard, long January 2027 $42.50 calls on PayPal, short December 2024 $70 calls on PayPal, and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.
