Block (SQ) was tarnished with the same brush as ARK Invest this past year. High growth was thrown out, but when Block share price plunged, did the baby get thrown out with the bathwater?
As it turns out, Block is poised for continued profitable growth. Unlike so many other high flying growth stocks that are losing massive amounts of money, Block is chalking up year after year of positive net income figures, so is it time to buy the dip?
What is Block, and what does it do?
Block is best known for providing merchants with payment processing solutions to make it easier for them to accept payments online. Block provides these features through two of its verticals: Square and Cash App.
But the company has been around since 2013 and also offers an impressive array of services, including cryptocurrency trading and storage, digital asset management, and lending services.
Square is a payment processor that enables businesses to accept payments online and in person. It also provides software solutions for companies to help manage their finances, such as invoicing, payroll, and accounting. Square has become increasingly popular with small businesses due to its ease of use and low cost.
Cash App has gained popularity among millennials looking for an easy way to manage their finances on the go. This company’s mobile banking service allows users to send money, pay bills, make deposits, and more. With Cash App now offering cryptocurrency trading capabilities, Block is well-positioned to capitalize on this growing market segment.
The history of Block and its growth trajectory
Since its launch in 2009, Block enjoyed meandering growth. At least that was until 2020, when the pandemic drove an influx of new customers to the platform. Block’s revenue growth accelerated from 2020 to 2021 as businesses and individuals shifted to digital payment solutions in response to the pandemic. This rapid growth has equated to over 80 million active users on the Cash Apps platform as of November 2022.
Despite this immense growth, Block has seen its share price drop by over 70% from its all-time high in late 2021. There are a few factors at play that have contributed to this drop and Block’s recent slowed growth, including:
- The Crypto Winter: Block, which recently changed its name from Square to signal its foray into the crypto market, has not been immune to the effects of the crypto winter. Bitcoin’s volatility caused Block’s revenue to drop, as users were less likely to trade bitcoin during this time. With Bitcoin currently below $20,000, it is a far cry from the near $70k highs seen this time last year. Some investors may be hesitant to invest in Block on the dip with no indication of an imminent crypto market recovery.
- Increased Competition: Block is also facing increased competition in the digital payment processing space from companies such as PayPal, Apple Pay, and Zelle, as well as small business-focused start-ups such as Shopify and Stripe. This has led to increased pressure on Block to remain competitive and keep up with the features offered by its rivals to maintain its user base.
Why now may be an opportune time to buy into the stock
Despite the recent dip in its share price, Block is well-positioned to remain a leader in the digital payment processing space. Though crypto trading may have caused a setback in its growth, the critical variable is that Block retained its user base while providing additional attractive features to new customers. This indicates Block’s ability to adapt to a changing market and its drive to innovate, which signals long-term growth potential for the company.
Some key aspects that make Block an attractive growth stock to invest in include:
- Profitable growth: Block has maintained profitable growth over the year, despite its recent dip in stock price. Gross profit has increased by 38% year-over-year, amounting to $1.57 billion in the third quarter of 2022.
- Acquired Afterpay: Afterpay is a payment platform that allows customers to pay for goods over time using the Buy Now, Pay Later option. This 29 billion dollar acquisition is expected to bring in additional revenue streams for Block and help the company expand into new markets.
- Rapid expansion: In 2021, Block attributed 87% of its gross profits to the American market. Block has since launched 44 new products in international markets to expand its user base, particularly in Europe, Japan, and Canada.
- Constant innovation: Block has consistently proven its ability to adapt and innovate. This is evidenced by Block’s new Cash App feature that allows users to purchase goods outside Square’s traditional merchant network online. In addition, Square also rolled out its new restaurant POS system, which is expected to increase efficiency and convenience for restaurant owners and is sure to see widespread adoption.
Should you buy Block on the dip?
For risk-averse investors, now may be an opportune time to buy into Block, given its share price decline and strong fundamentals. With a profitable growth model, rapid expansion across international markets, and constant innovation, it is well-positioned to remain a leader in the digital payment processing space. Investing in Block at this stage could prove lucrative for investors willing to take on higher-risk investments.
For the more conservative investor, however, now may not be the best time to invest in Block until there is more clarity about the direction of the crypto market. As mentioned before, Bitcoin’s volatility has caused a drop in revenue for Block. It would be wise to wait until signs of a recovery are on the horizon.