Why You Should Buy Block Stocks (And It’s Not Bitcoin)

The name change of Square to Block (SQ -4.43%) dramatically changed the narrative for the company. Once seen as a pure fintech stock, it has moved into music streaming with Tidal and built a cryptocurrency ecosystem that makes it seem more like a conglomerate.

Consequently, Block’s performance has become more in line with that of Bitcoin (CRYPTO: BTC), which reinforces the perception that it is a different business. Nonetheless, a closer look at the company indicates that Block remains primarily a Square and Cash App, and at least for now, investors have little reason to consider other ventures while evaluating the stock.

Blockchain: Perception vs. reality

The state of the block inventory has changed dramatically in a year. Last September, Block (still known as Square at the time) sold for more than $250 per share. Also, Jack Dorsey managed both Block and Twitterand Bitcoin was in a bull market.

As of late November, Dorsey devoted himself to the company full-time, leading to the name change and emphasis on its Bitcoin-based segments, Bitcoin development company Spiral and web platform TBD. Dorsey even predicted that Bitcoin would replace sovereign currencies.

Both Block and Bitcoin subsequently lost most of their value. Granted, most tech stocks have fallen, so you can’t blame Block’s decline on Dorsey’s forecasts. Still, the company’s fortunes seem tied to Bitcoin. Since Dorsey became the full-time “Block Head”, Block stock has fallen 65%, while Bitcoin is down 62%.

Unfortunately for Block shareholders, the stock may have fallen victim to a false perception. Technically, Bitcoin accounted for $3.5 billion of Block’s $8.4 billion in revenue in the first half of 2022. However, since the company transacts the cryptocurrency, most of that “revenue” would count as payment volume if the accounting rules were different. After deducting Bitcoin costs, the real Bitcoin income is only around $85 million in the first six months of the year, about 3% of the gross profit.

The Square and Cash App ecosystems

Therefore, instead of worrying about Bitcoin, Block investors should judge the company based on the Square and Cash App ecosystems, which still account for almost all of the company’s revenue. Cash App is a social payment platform that accommodates users’ expenses, deposits and investments. Cash App also led the way in Bitcoin trading on its platform when it started trading the cryptocurrency in 2018. With this functionality, it boasts 47 million monthly active users and has beaten PayPal‘s Venmo for the number of downloads on applehis iPhone, according to MobileAction.

The Square segment also built a successful niche with businesses. The platform can accommodate almost all of a company’s financial needs. This includes transactions, payroll, inventory, point of sale and loans. In the US, where it opened an industrial bank, Square can also manage a company’s checking and savings accounts.

In addition, it moves across the developed world and currently operates in eight countries. As three of the countries are in the EU, that foothold could mean a relatively easy move into the 24 EU countries it does not yet serve. Also, only $146 million of gross profit for the first two quarters (around 5%) came from outside the US, meaning the non-US markets have significant growth potential.

The state of the block storage

Overall, Block reported $2.8 billion in gross profit in the first two quarters of 2022, a 31% year-over-year growth. Still, operating costs rose 68% during that time, leading to a first-half loss of $417 million. Block earned $243 million in the same period a year ago.

Block’s investments in the business could ease concerns about returning to losses. This is crucial, as investors have shown less leeway for companies that are losing money in this bear market.

Another consideration is an expensive valuation, as its price-to-free cash flow ratio of 70 makes it significantly more expensive than PayPal at 22 times free cash flow. Nonetheless, the aforementioned 31% gross profit growth for the first half of 2022 could help make Block a buy in this bear market due to its continued rapid growth.

Admittedly, Bitcoin, Tidal and other parts of Block may become a more consequential share of gross profit over time. But considering the bright future of the Square ecosystem and Cash app, Block stock could make a massive comeback with or without the newer segments.