Why you should buy Block Stock (and it’s not Bitcoin)

The name change of Square in To block (SQ -5.58%) radically changed the narrative for the company. Once seen as a pure fintech title, it switched to music streaming with Tidal and built a cryptocurrency ecosystem that makes it feel more like a conglomerate.

As a result, Block’s performance became more closely aligned with that of Bitcoin (CRYPTO: BTC), reinforcing the perception that it is a different company. However, a closer look at the company indicates that Block remains primarily Square and Cash App and, for now at least, investors have little reason to consider its other initiatives when valuing the stock.

Block stock: Perception vs. reality

The status of Block shares changed dramatically in a year. Last September, Block (still known as Square at the time) sold for more than $ 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 company full-time, leading to the name change and emphasis on the Bitcoin-based segments, the advance company of Bitcoin Spiral, and the TBD web platform. Dorsey even predicted that Bitcoin would replace sovereign currencies.

Both Block and Bitcoin subsequently lost most of their value. Sure, most tech stocks have fallen, so Block’s decline cannot be blamed on Dorsey’s predictions. However, the company’s fortunes appear to be tied to Bitcoin. Since Dorsey became the full-time “Block Head”, Block shares have fallen 65%, while Bitcoin is down 62%.

Unfortunately for Block shareholders, the stock may have fallen victim to a misperception. Technically, Bitcoin made up $ 3.5 billion of Block’s $ 8.4 billion in the first half of 2022. However, as the company transacts with the cryptocurrency, most of that “revenue” would count as payment volume. if the accounting rules differed. After subtracting the costs of Bitcoin, Bitcoin’s actual revenue amounts to only about $ 85 millions in the first six months of the year, around 3% of gross profit.

The Square Ecosystems and Cash App

Therefore, instead of worrying about Bitcoin, Block investors should judge the company based on the Square and Cash App ecosystems, which still account for nearly all of the company’s revenue. Cash App is a social payments platform that welcomes users’ expenses, deposits and investments. Cash App also pioneered Bitcoin trading on its platform when it started trading cryptocurrency in 2018. With this feature, it boasts 47 million monthly active users and has beaten PayPalVenmo for the number of downloads on AppleiPhone, according to MobileAction.

The Square segment has also built a successful niche with companies. The platform can meet almost any financial need for a business. This includes transactions, payroll, inventory, point of sale, and loans. In the United States, where he opened an industrial bank, Square can also manage a company’s checking and savings accounts.

In addition, it is moving into the developed world and currently operates in eight countries. Since three of the countries are in the EU, that foothold could mean a relatively easy move to the 24 EU countries that isn’t needed yet. Additionally, only $ 146 million of its gross profit for the first two quarters (around 5%) came from outside the United States, meaning its non-US markets have significant growth potential.

The status of the Block actions

Overall, Block reported gross profit of approximately $ 2.8 billion in the first two quarters of 2022, up 31% year-over-year. However, operating expenses increased 68% during that period, leading to a loss for the first half of the year of $ 417 million. Block made $ 243 million in the same period a year ago.

Block’s investments in its business can alleviate concerns about return on losses. This is critical, as investors have shown less leeway for money-losing companies in this bear market.

Another consideration is an expensive valuation, as its price / free cash flow ratio of 70 makes it noticeably more expensive than PayPal with 22x free cash flow. However, the aforementioned 31% gross profit growth for the first half of 2022 could help make Block a buy in this bear market thanks to its still rapid growth.

Sure, Bitcoin, Tidal, and other parts of Block can become a more consequential share of gross profits over time. However, considering the bright future of the Square ecosystem and the Cash app, Block shares could make a huge return with or without its newer segments.

Will Healy has positions in Block, Inc. and PayPal Holdings. The Motley Fool has positions and recommends Apple, Bitcoin, Block, Inc., PayPal Holdings, and Twitter. The Motley Fool recommends the following options: March 2023 $ 120 long calls on Apple and March 2023 $ 130 short calls on Apple. The Motley Fool has a disclosure policy.

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