In an era of digital transformation, Block Inc. (SQ, Financial) has carved a remarkable path to success through its strategic innovations and dynamic segments. Its fastest-growing arm, Cash App, has played a pivotal role in driving a surge that defies industry slowdowns.
Even though Block reported solid earnings, the fintech stock plunged and is still 77% below its peak. In this discussion, I review the expansion of Block's Cash App, its gross payment volume and valuation.
Cash App
Block generated a gross profit of $1.87 billion for the second quarter, up 27% from a year ago. Cash App accounted for $968 million of that total, above the $935 million expected. About 52% of the fintech company's overall gross profit was attributable to Cash App, which increased twice as quickly as the Square division.
Cash App increased the gross profit by 37% in the second quarter. This helped the company exceed its revenue and bottom-line estimates despite a slowdown in its core business. The mobile payment service enables users to send and receive money via a smartphone app, which, over the past couple of years, has experienced significant subscriber growth.
The app's number of monthly active users is expected to increase by 15.7 million between 2023 and 2027. Another 50 million monthly active users are anticipated in 2024, representing a 9.9% increase from this year, and in 2025, it is anticipated to increase 8.60% to 54.3 million. However, growth is anticipated to slow in the following two years.
Source: Oberlo
Strong performance and expansion prospects
The gross payment volumes that pass through Block's ecosystems are one of the main factors influencing its expansion. Square GPV reached $54.15 billion, up 13% annually and on a constant currency basis. In addition, Block's GPV in 2022 reached $203 billion, split between Cash App for corporate accounts ($16.5 billion) and Square ($186.5 billion).
In the second quarter, Square's transaction-based revenue increased by 11% to $1.50 billion. As a result of a higher ratio of card-present and credit card transactions year over year, which are less favorable to economics on a per-transaction basis, Square had more favorable interchange economics throughout the quarter.
Finally, Block's GPV has historically increased at a compound annual growth rate of 19.3% since 2018. Therefore, based on this CAGR, GPV is projected to reach between $600 million and $1 billion in 2030.
Source: Block's second-quarter shareholder letter
Assessing risk and reward
In contrast to its current price of $62.82, Block has a GF Value of $119.04, suggesting the stock is undervalued and has room to rise.
The price-sales ratio of 1.91, however, is higher than the five-year and 10-year average, indicating the stock may be overvalued compared to its past performance. Additionally, the stock may be overpriced compared to its competitors, given its enterprise value-Ebitda ratio of 382.31 is higher than the industry median of 13.42.
The stock also carries several risk factors that investors should consider. First, the company has concerning long-term debt, with $1.8 billion issued over the past three years, suggesting a potential burden on its financial health. Second, Block has experienced losses in 58% of the past 12 quarters, indicating a lack of consistent profitability, raising concerns about its ability to generate sustainable returns.
Additionally, Block's total assets have been growing faster than its revenue, indicating potential inefficiency in asset utilization. This may suggest the company needs to utilize its resources more effectively to generate revenue. Further, the gross margin has been declining at an average rate of 6.1% per year, indicating a deteriorating profitability trend over the long term.
Lastly, many other businesses are also creating bitcoin-based goods and services. Some of them are more resourceful and experienced than Block, and they might be a high risk to its commercial endeavors. For instance, two significant payment providers, PayPal Holdings Inc. (PYPL, Financial) and Mastercard Inc. (MA, Financial), heavily utilize the cryptocurrency, so they could outperform Block because of their extensive consumer bases and global presence.
Final takeaway
A closer look at all the data shows that the pros outweigh the cons. If Block can keep up this pace, the fintech stock might report positive net income on a GAAP basis in a matter of quarters, raising the possibility of a long-awaited turnaround in its stock.
Block's strategic innovation and dynamic segments, notably Cash App, have propelled its success amid a digitally transforming landscape. The ecosystems of Square and Cash App are expanding quickly, and even if the state of the economy somewhat slows this expansion, the company's gross profit should rise at a double-digit rate.
