Until December 1, 2021, Block (SQ) was known by its original name, Square. The company, founded in 2009, had spent more than a decade developing payment systems that helped individuals and small businesses exchange money. The Square payment platform is still one of Block’s most popular products. The small device can turn practically any smartphone or tablet into a point-of-sale system that accepts credit card payments.
Between 2019 and 2020, Block shares bounced between $50 and $75. Like most stocks, SQ dropped considerably on March 20, 2020, falling to just $38. Then, it began a climb that took its price to about $275.
Buying Block became an expensive proposition until late 2021 when the price slid below $200. Today it’s trading closer to its 2019 trading levels than its highs a few quarters ago. So, is it finally the right time to buy Block?
Block’s Financials Show Noteworthy Improvements
Although the share price is back to where it was 3 years ago, Block’s financials have improved considerably since then.
In 2019, the company reported $4.71 billion in revenue. By 2021, it had reached $17.6 billion in revenue. Such rapid growth shows that Block has been able to maintain its customers while expanding its reach.
In percentage terms, Block’s revenue growth has been stellar:
- 2019: 42.9%
- 2020: 101.5%
- 2021: 86.0%
However, the momentum slowed into the first quarter of 2022. The company reported $3.9 billion in top line revenues, a decline of 21% from the same quarter a year prior.
As an aside, Cash App proved to be a huge winner during this time. The company’s major sources of gross profit were split between Cash App ($624 million) and Square ($661 million).
Taking a step backwards on sales cost the company dearly in terms of shareholder value. The share price plummeted. So the question is whether Block has plateaued or can it return to winning ways?
Emerging Opportunities for Block
Block has several emerging opportunities that could reach new customers and generate higher revenues.
Since 2020, it has acquired Credit Karma Tax and Afterpay. Credit Karma Tax will become a part of Cash App. The free, DIY tax service will make it possible for Block to offer immediate tax rebates through its app.
Even if Credit Karma Tax (now named Cash App Taxes) doesn’t boost top line sales directly, it should encourage more people to use Cash App, which in turn should lead to higher user retention, a key metric in boosting customer lifetime value.
Afterpay is also an attractive addition to Block’s suite of consumer-facing products. Afterpay offers buy now pay later (BNPL) services that should appeal to customers who want to avoid credit cards and high interest rates. The service collects 4% to 6% from companies that accept its BNPL option. Afterpay is generally regarded as the leader in the BNPL industry with Klarna ranking second and Affirm third.
Assuming that these services attract more individuals and businesses to Block’s ecosystem, the company should have ample room for growth.
Is Block’s Stock Positioned for Rapid Growth?
Based exclusively on its financial performance, Block’s stock price probably shouldn’t have fallen to current levels. The market isn’t always as rational as one would hope, though.
It hasn’t help that the Fed raised interest rates to combat inflation. That move might help the economy in the long run, but it has made investors wary of companies that work so closely with credit. Regardless of Block’s financial performance, a lot of shareholders felt nervous about its future.
Nevertheless, a falling stock price in recent months doesn’t mean the horizon isn’t bright for Block. When we ran a discounted cashflow forecast analysis on Block, we arrived at a fair market value of $74.44 per share, suggesting 15% upside at the time of research.
The consensus among analysts is much more bullish; on average they see Block having an intrinsic value of $137.09, which would represent over 100% upside potential. Either way, the opportunity for Block is likely larger to the upside now than the downside.
Should You Buy, Sell, or Hold Block?
If you wanted to hop on board the Block train in 2020-21 when shares were soaring but couldn’t justify the lofty valuation, now is a much better time to take a swing at bat.
After scrutinizing the company’s financial statements, we see significant upside potential and a generous margin of safety. Of course, the share price can still fall further short-term but the odds favor higher prices in the medium to long term.