Forget Bitcoin, Block’s ecosystems are the real growth drivers

It’s been a tough year for payments platform fintech Block (NYSE: SQ ) shares as it trades down (-58%) on the year. The old saying, “it is better to have had and lost, than never to have had at all” is what optimistic investors have to remind themselves every day. The pandemic was a boon for e-commerce and payments companies like Block, PayPal (NASDAQ: PYPL ), Shopify (NASDAQ: SHOP ), Ali Baba (NASDAQ: BABA ), Amazon (NASDAQ: AMZN ) and Apple (NASDAQ: AAPL ) as consumers migrated to the digital economy that includes payments and investments. Bitcoin’s dramatic rise above $64,000 boosted profits for Block which accounted for nearly 70% of total revenue in 2021. Unfortunately, the tragic collapse back to $20,000 has left many tailgaters in its wake to shift their focus away from the other segments. Sentiment has taken a deep dive as consumers rein in spending due to rising inflation and bitcoin prices do not appear to recover much beyond the $20,000 level. As the hangover wears off and the extreme 2021 year-over-year comps come behind us, investors may reassess the strength of Block’s ecosystems and their cumulative multiplier effect.

Network effect of ecosystems

At its core, Block successfully demonstrates how the network effect together with a one-stop shop strategy that enables overlapping services that connect merchants with consumers can have a multiplier effect on revenue. As bitcoin mania has subsided, investors can refocus on the core drivers of the business. The two main ecosystems are the Square payment processing platform and merchant network and the $Cash app. Bitcoin trades are done through the $Cash app. The key point here is that while bitcoin prices have declined, transaction volumes from the two ecosystems have continued to grow by double digits.

Legacy Square Ecosystem

Square is the legacy business that enables small and medium-sized businesses down to a single person to accept and process credit cards and digital payments. The business continues to expand at a slower pace as competition is fierce. The Square for Restaurants product suite that enables first- and third-party integrations for merchants. Its product line restaurants enable any size restaurant to control various aspects of the business, from point of sale (POS) to delivery orders and team management. The platform makes it easier for new Square businesses to import menus or create automated menus from PDF, images or websites. Personal integration has been added for Square sellers in the US and Australia.

$Cash App Ecosystem

The $Cash app is the primary growth driver as it continues to add features for consumers to make digital payments, stock and bitcoin investments, and find deals on products and services. The $Cash app is becoming the central hub for its consumers beyond payments. It is a discovery tool for finding products, brands, offers and businesses. Like Acorns, Cash App has also added a Round Ups feature that allows users to invest their spare cash rounded up to the nearest dollar on Cash App Card purchases into stocks or Bitcoin. As a one-stop hub for transactions, $Cash App’s only true competition is PayPal and the Venmo app.

Back to normal

Block’s final quarter could bring the business back to a normal baseline after digesting the pandemics as annual compensations become more affordable. On August 4, 2022, Block reported its Q2 2022 earnings for the quarter ending June 2022. The company reported $0.18 earnings per share (EPS), beating analysts’ consensus estimates of $0.20 by 0.02 dollars. Revenue fell (-5.8%) year-over-year (YoY) to $4.41 billion, beating consensus analyst estimates of $4.33 billion. Rising operating costs caused adjusted EBITDA to fall to $187 million compared to $360 million in the same period a year ago. Much of the operating expenses are linked to the Afterpay platform. Square generated $681 million in gross profit, up 16% year-over-year, excluding $75 million in gross profit from Afterpay . Afterpay added $150 million in gross profit split between Square and $Cash App. $Cash App Business GPV increased 4% year-over-year to $4.2 billion. Cash App delivered gross profit of $705 million, an increase of 29% year-on-year or 15% excluding postpaid. The $Cash app generated $116 million in transactional revenue, up 5% thanks to growing business accounts and transactions.

Here’s what the charts say

Using rifle charts on a weekly and daily time frame provides a precise view of the landscape for SQ stocks. The weekly rifle chart peaked near $92.29 Fibonacci (fib) level. The weekly 5-period moving average (MA) support is starting to fall at $71.53 along with the 15-period MA at $73.83. The weekly stochastic is still rising, but is declining at the 50 band. The weekly market structure low (MSL) buy triggers on the $71.01 breakout. The weekly upper Bollinger Bands (BBs) are compressing at $110.70 with the weekly lower BBs at $46.64. The daily rifle chart has been bearish with a falling 5-period MA resistance at $68.67 followed by 15-period MA resistance at $75.30 with 50-period MA at $73.24. The daily lower BBs are at $58.06. The daily stochastic completed a full swing down to attempt to bounce the oversold 10 band. Attractive retracement levels are at $66.27 fib, $62.88, $59.79 fib, $56.01, $53.31 fib and $48.48 fib levels.

Connect the ecosystems

Block CEO Jack Dorsey commented: “We continue to make progress, connecting our ecosystems. The connections we build like with Afterpay are what set us apart and make us so valuable to our customers. In Cash App, we’re just starting to bring Afterpay’s discovery capabilities into our ecosystem. The biggest overall opportunity we see is in commerce. Afterpay will introduce discovery and shopping to build on the elements that Cash App has already created around commerce, like Cash App Pay and Boost. We believe that our new design with Cash App will let us scale new products and drive deeper engagement We’re rolling out a new Discover tab to the main navigation, making it easier for customers to find and use brands and products that can save with Boost and pay in installments with Afterpay.”

Postpaid Omnichannel Energizer

Afterpay is buy-now-pay-later (BNPL) service that Block integrates into its Square and $Cash app ecosystems. It brings the transaction sequence full circle. It gives customers the ability to purchase items in advance and make installment payments seamlessly from the app or online. It has been shown to boost sales for merchants and spending from consumers. It is an omnichannel tool that allows sellers in the network to help increase sales both online and in person. Afterpay omnichannel customers spent 3x more than single channel consumers in 2021. This is the growth driver as it adds another layer of fees to merchants and customers with each sale. $Cash App users can use Afterpay to seamlessly purchase items on a convenient payment plan that can automatically withdraw funds from the Connect bank source. Afterpay is an energizer that will strengthen both the Square and $Cash App ecosystems. An increase in bitcoin prices is just icing on top of the multi-layered cake. In a nutshell, both Square and $Cash App businesses grew 29% year over year while bitcoin fell (-60%). The share is down (-58%) for the year. Throw back the bitcoin price drop and you still have a solid growth company with its core business growing at 29% year over year.

Companies mentioned in this article

Compare these stocks Add these stocks to my watchlist

Before you consider Block, you should hear this.

MarketBeat keeps track of Wall Street’s top-rated and best-performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches on… and Block wasn’t on the list.

While Block currently has a “Moderate Buy” rating among analysts, top-rated analysts believe that these five stocks are better buys.

See the five stocks here