Is Block Stock a Buy?
The S&P 500 recently surged to new all-time highs following the Federal Reserve's first interest rate cut in two years. Although the broader market index continues to go higher, that doesn't mean there aren't deals out there for patient investors today.
Block (NYSE: SQ) is one stock that is still 76% below its all-time high from over three years ago. The company has taken a page out of bigger tech companies' playbooks and is looking to cut costs and become more efficient to improve margins and the bottom line. It is making solid progress on its initiatives, but is it enough to make the stock a buy today?
Block's rapid growth has come at a big cost
Block offers a suite of financial products that appeal to businesses and individuals. The company's original product, the Square point-of-sale system, enables businesses to process payments and manage sales and inventory. First launched in 2009, this novel technology allows small businesses to accept payments quickly and easily using a smartphone or tablet and helped usher in a new age of digital payments.
The company also offers the Cash App, which is one of the most popular investment apps among all generations, according to The Motley Fool's Generational Investing Tools survey. Through the Cash App, customers can access banking services, invest in stocks and Bitcoin, and manage payments through Afterpay, Block's buy now, pay later service.
Block's growth over the years is undeniable. Since 2017, Block's total revenue has gone from $2.2 million to nearly $22 million last year, good for a compound annual growth rate of 46.5%. This strong growth is driven by growing sales on transaction-based revenue, subscription and services-based revenue from the Cash App, and Bitcoin-related revenue from its customers' purchase of Bitcoin through Cash App.
Despite robust top-line growth, Block's expenses had been growing faster. The company's net income had fallen every year from 2019, when it earned $375 million, through 2022, when it posted a net loss of $541 million.
It wasn't until last year that the fintech began reining in its expenses, and CEO Jack Dorsey laid out a longer-term plan to get Block back on track. Dorsey's goal is the "rule of 40," where Block will aim to have its gross profit growth plus adjusted operating margin add up to 40% by 2026. The primary purpose of this goal is to get the company to improve its margins and achieve growth as efficiently as possible.
What's next for Block?
Last year, Block announced plans to limit its employee count to 12,000 to keep expenses down. Dorsey said: "We expect to keep this cap in place until we believe the growth of the business has meaningfully outpaced the growth of the company."
So far, the company's efforts to lower expenses are paying off. Through the first six months of this year, Block's net income is $667 million, well above last year's net loss of $3.7 million.
In order to achieve more efficient growth, Block aims to better integrate all of its product offerings into one. Notably, Dorsey told investors that Block's ability to integrate Square and Cash App "enables us to provide consumer experiences others can't, specifically for commerce."
In a memo to employees in July, Dorsey told employees that Block would remove its business silos and disband the business unit reporting structure. Dorsey wants to take Block back "to how we started as a company" and will address Block's "three problems" relating to "collaboration, craft, and flexibility."
Is Block a buy now?
While the restructuring meshes with Dorsey's previous comments, Macquarie analysts, as reported by The Fly, are concerned that Block is making "slower progress on initiatives." For those holding Block stock, that could mean that a rebound in the near future may not be in the cards.
However, I'm optimistic that the restructuring is the best move in the long term. The company's Cash App is well-positioned, especially among younger investors, and better integration with Square and Afterpay could give its payment network a big boost.
Block still needs to execute its plans, but it has shown solid progress this year as its bottom-line results continue to improve. Today, the stock is priced at a price-to-earnings ratio (P/E) of 15.2 based on one-year forward earnings, which could provide an attractive entry point for long-term investors.
If you're not convinced, you'll want to monitor its earnings results over the next few quarters and wait for confirmation that the company is making further progress on its goals.
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Courtney Carlsen has positions in Bitcoin and Block. The Motley Fool has positions in and recommends Bitcoin and Block. The Motley Fool has a disclosure policy.
Is Block Stock a Buy? was originally published by The Motley Fool