Block (SQ -1.18%) has been among the hardest hit by the market's rethinking of growth stocks over the last year and a half, falling 74% from its highs at recent prices. But the company continues to perform well, despite the falling stock price.
The Square ecosystem continues to grow in both size and profitability, while the Cash App has become a financial juggernaut. The stock may be down, but the future is bright for Block as a company.
Image source: Block.
The heart of Block
The Square ecosystem will always be the core of Block. Its distinctive card readers were ubiquitous among small businesses and independent entrepreneurs as the company made its name more than a decade ago, and over time, it developed software that helped those businesses manage their books and build their operations. Today, this merchant business is still extremely healthy, taking not only a small portion of each dollar going through Square payments but also a fee for software in the form of subscriptions.
Gross payment volume through the Square ecosystem rose 14% to $48.6 million in the fourth quarter, and the business is now well diversified, accommodating very large enterprises as well as small businesses. Subscription revenue has also grown rapidly, from $105 million in the fourth quarter of 2019 to $234 million in the same period last year. This is revenue that's not dependent on third-party payment processors and tends to sport a very high margin.
International momentum is building as well, with 18% of Square's gross profit, or $139 million, coming outside of the U.S.
Block's growing consumer business
The Cash App, a peer-to-peer payments option, has become an incredible business for Block in a relatively short amount of time. In the fourth quarter of 2022, the Cash App generated gross profit of $750 million, up 64% from a year ago and 45% even without the help of Afterpay, the buy now, pay later company Block acquired in 2021 to make it easier for users to pay merchants or send money on its platforms. For the year, Cash App's gross profit grew 43% to $2.95 billion.
And the new Cash Card, a basic debit card connected to a user's Cash App account, continues to be a key driver of success, with $750 million in gross profit for the year. The card is a better driver of inflows of money into the ecosystem, where it can be invested in stocks or spent on goods and services -- as the Cash App takes a portion of the transaction fee.
The new juggernaut in finance
Block has built two businesses that are each a force to be reckoned with in finance. Square is key to the operations of many small businesses, and the Cash App is a go-to for millions of consumers. But eventually building a financial ecosystem of buyers and sellers where Block is the transaction layer, not credit card companies, is where Block really gets its long-term advantage. Block has the ability to create lower-cost transactions (potentially using the blockchain through efforts by its "TBD" division, which is focused on decentralized finance) and gives incentives to both buyers and sellers to stay within the Block ecosystem.
What management must do now is increase the profitability of the business. Gross profit of $5.99 billion in 2022 is great, but operating costs were $6.62 billion, leading to a net loss of $540.7 million, or $0.93 per share. If Block is going to be a great investment long-term, it'll need to start churning out consistent profits. I think it can do that given the growth trends and improving EBITDA and cash flow it's gotten with scale, but like others in Silicon Valley, cost restraints aren't second nature to Block.
The stock has pulled back dramatically from its highs and now trades for 2.5 times sales, a multiple we haven't seen since 2017. If Block can continue to grow and expand margins, I think this will be a powerhouse in finance and will be a great investment for the next decade or more.
