Uncovering Block’s (NYSE:SQ) impressive growth story beyond Bitcoin

blocks (NYSE:SQ) growth story is still quite impressive. Nevertheless, the share has performed worse in the past year. It is actually still operating at the same level as in August 2018, although the company has shown remarkable progress in recent times. This leads me to believe that the market may not be pricing Block’s prospects accurately, indicating strong upside potential for the stock going forward.

On the one hand, there is no doubt that several challenges are currently affecting the company’s performance, such as a decline in bitcoin (BTC-USD) related revenues and a slowdown in economic growth that negatively affects Block’s merchants.

On the other hand, we cannot ignore that Block’s ecosystem is developing rapidly, with CashApp, in particular, delivering impressive metrics. In addition, there are clear signs of improving margins and profitability prospects. Given these factors, I am bullish on the stock.

Block does not need Bitcoin to drive growth

In the second half of 2021, Block was riding high on a wave of growth and skyrocketing share prices, thanks in no small part to the frenzy surrounding cryptocurrencies – especially Bitcoin. However, with trading volumes for crypto (including Bitcoin) now in a state of notable decline, the company finds itself without the external revenue boost it once had.

Yet Block’s core businesses are still thriving, thanks to its creative solutions. Although last year’s bitcoin-related activity was a tough comparison, Block still managed a robust 14% revenue growth, clocking in at a staggering $4.65 billion in Q4.

The Cash app dominates the App Store

Block’s growth prospects remain impressive, with much of its success credited to the remarkable performance of its star player – Cash App. The Cash app’s exceptional features, effortless ease of use, and unparalleled convenience have claimed the coveted #1 position in the Finance category on the US App Store, leaving behind even the most established competitors, such as Paypal (NASDAQ:PYPL) and its subsidiary Venmo, in the dust.

Cash App boasts a staggering 51 million monthly active transaction users, a remarkable 16% increase from the previous year. As more and more users embrace the Cash App, with many adopting the Cash App Card, the app continues to generate greater engagement within Block’s dynamic ecosystem. With this steady expansion, Block remains well-positioned to drive top-line growth, as evidenced by its impressive 33% year-over-year revenue growth to $2.82 billion if we exclude bitcoin-related revenue.

Subscriptions and services: Explosive performance

Block’s subscription and services division saw even more explosive growth, with revenue rising to a staggering $1.31 billion, marking an unprecedented 69% increase from last year’s figure. While it’s true that this massive increase can be partly attributed to last year’s takeover of Afterpay, the Buy Now, Pay Later (BNPL) company, the division’s organic growth was also notable. In fact, subscription and service-based revenue, excluding the acquisition of BNPL, rose by an impressive 35% to reach $1.04 billion.

One step closer to GAAP profitability

In addition to the fact that Block has managed to maintain its organic growth at satisfactory levels, I am pleased to see that the company is making steady progress towards achieving GAAP profitability. This is largely due to the improved margins driven by economies of scale and synergies within the ecosystem.

In the fourth quarter, Block posted a record gross profit of $1.66 billion, up 40% year over year. About half of that, $848 million, was generated by CashApp, whose gross profit soared 61% from a year earlier. Square contributed the rest of that amount, with gross profit of $801 million, up 22% year over year. Gross profit growth of 40% over revenue growth of 33% demonstrated Block’s overall margin expansion story.

The increase in gross profit pushed adjusted EBITDA to $281 million in Q4, up 52.7% compared to last year. Therefore, adjusted EBITDA margins also increased. Admittedly, Block has had a hard time controlling some of his discretionary spending, including his stock-based compensation, which jumped 55% to $274.5 million. This led the company to report a GAAP net loss of $117.6 million for the quarter.

It’s certainly not a pretty number for shareholders to see, especially in the current environment. The last thing investors want to see these days is heavy dilution on top of losses. Nonetheless, through expanding margins, the company is getting closer to reaching GAAP profitability with the quarter, which I would bet could be the case during the second half of 2023.

Is SQ Stock a Buy, According to Analysts?

As for Wall Street, Block has a strong buy consensus rating based on 19 buys and five holds assigned over the past three months. At $99.24, the average Block stock price target implies 34% upside potential.

The takeaway

Overall, despite the obstacles that Block is currently facing, such as falling bitcoin-related revenues and economic headwinds affecting its merchants and transaction users, the company has shown impressive growth in its core businesses.

Both Cash App and subscription and services revenues continue to grow at exceptional rates given the current trading environment, while the company is steadily undergoing a margin expansion story that should lead to GAAP profitability sooner rather than later.

At a forward P/E of around 40, the share may not appear to be a bargain. However, as margin expansion gathers pace, it can lead to a snowball effect on both margins and net income. So don’t be fooled by many, but remember that the market may take it literally, which could keep stocks under pressure.

Mediation