Brief Breakdown: Revisiting Block Inc. (NYSE: SQ)
In our Stock Revisits, we will discuss what has changed since we previously wrote about the company and give updated bull and bear cases based on these changes.
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Company Description
We previously wrote a stock breakdown of Square Inc. (which you can find here). However, given that the company recently announced several major changes, including rebranding to Block Inc., we thought it would be interesting to revisit our initial analysis and update accordingly. Block Inc. is an American financial services and digital payments company that acts as a commerce ecosystem. SQ (the company retained their original ticker, even after rebranding to Block) allows small businesses to start, run, and grow by turning mobile and other computing devices into payment and point-of-sale solutions. Sellers can immediately start accepting payments in person via magnetic stripe, Europay, MasterCard, Visa, or Near Field Communications such as a tap. Square was founded in 2009 by Jack Dorsey and Jim McKelvey and launched its first product in 2010. Square owns the popular person-to-person money transfer app Cash App, which recently announced several new features, including Bitcoin Lightning Network transactions and the ability to file taxes for free. Jack Dorsey is a well-known advocate of Bitcoin and its potential as the shared monetary system of the internet. In October 2020, Square put 1% of their total assets at an estimated $50 million in Bitcoin, which is now worth over $220 million. Square cited Bitcoin's “potential to be a more ubiquitous currency in the future” as their reasoning for the decision. In 2021, Square reached an agreement to acquire majority ownership in Tidal, a subscription-based music, video, and podcast streaming platform. In November 2021, Jack Dorsey resigned from his position at Twitter and just days later, Square rebranded to Block and announced their intention to focus more specifically on Bitcoin-related projects. Just last week, Block announced that they are moving forward with their plan to build a new, more accessible Bitcoin mining system.
Quantitative Analysis
When we last wrote about SQ (6/21/2021) it was trading at $237.05. Now, at the time of this writing (1/16/22), it is trading at $133.29 with a 52 week range of $129.31 - $289.23 and a market cap of $61.48B. Block’s gross profit in Q3 of 2022 was $1.13 billion with a 43% increase year-over-year and an adjusted EBITDA of $233 million. The return of equity (ROE: Net Income / Total Equity *100) of Block is 20.18% and the price to earnings (P/E) ratio is 133.69, and the Net Margin (Net Income / Revenue) is 3.21%. This financial analysis was done using financialstockdata.com (sign up using our promo code GCI here). You can view SQ’s last quarterly earnings here and 2021 annual report here. Below we have percent returns for SQ since January of 2020 denominated in both USD and in Bitcoin.
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Qualitative Analysis
Block’s outlook has changed since we last wrote about them, largely due to co-founder Jack Dorsey leaving his position at Twitter to focus solely on Block and Bitcoin. With Block’s rebranding and recent announcements regarding Bitcoin mining, the launch of the Lightning Development Kit (LDK), and Lightning Network transactions on Cash App, it’s clear that Bitcoin-related products will be a major focus for the company moving forward. At the time of our previous analysis (6/20/21), Bitcoin was priced around $35,000 and many small businesses were experiencing difficulties with the COVID-19 pandemic and related economic consequences (e.g., reduced foot traffic, shutdowns, etc). At the time of this analysis (1/16/22), Bitcoin is priced around $43,000 and businesses are returning to “normal,” at least in many states in the U.S. However, Block is not entirely focused on Bitcoin. They also recently rolled out a free tax filing feature on Cash App, indicating their intent to remain focused on traditional financial products as well. Founder-led companies historically have more success than non-founder led companies, so it will be interesting to see more changes and developments that occur with Block as Jack devotes more time to the company.
Below, we lay out the bullish and bearish arguments we made for Block in our previous analysis. For each point, we discuss whether the point still holds and provide updated bullish and bearish arguments.
Bullish Thesis
Here are three previous points to support the bullish thesis of Block, and we will discuss whether or not we believe these points still hold true:
High Revenue: This point still holds true AND Block had a $0 million net income loss this past quarter which they have not had in quite some time. Block’s earnings have still been healthy but the stock price has not reflected that success as of late, so hopefully the market will be more forgiving going forward.
Bitcoin: Of course at Green Candle we are extremely bullish on Bitcoin and this still holds true. Block is implementing Lightning Network in CashApp and hiring engineers in order to develop a new in-home Bitcoin mining system. Block will continue to be Bitcoin friendly and it will continue to benefit from using the Bitcoin payment system and network.
Product Diversification: As described above, Block is adding new products at a rapid pace. Block seems to be developing more and more products and with Jack Dorsey now working at Block full time, it seems that trend will continue.
Additional Bullish point that has changed since the last time we wrote about Block:
Full Time Jack Dorsey: As mentioned multiple times above, Jack Dorsey has resigned from his position at Twitter and is now dedicating his full time to Block. Founder led companies are more successful than non-founder led companies and now Jack has no other distractions to take his mind away from Block. Since Dorsey’s departure from Twitter, Block has undergone a name change, rolled out a free tax filing service through CashApp, announced it is hiring engineers to develop Bitcoin home miners, and started using the Lightning Network for payments and transactions in CashApp. This has all occurred in a few short months and at this pace, investors should be encouraged on the growth and rapid development that is seemingly ahead for Block.
Bearish Thesis
Here are three points that we used previously to support the bearish thesis:
Polarization of Jack Dorsey: When Dorsey was CEO of Twitter, there were plenty of complaints from the public, particularly about censorship on the platform.
UPDATE: In November, Dorsey stepped down from his leading role at Twitter and shifted his focus toward Block. Since stepping down, Dorsey has not only been vocal in his support of Bitcoin, but he’s putting his money where his mouth is by rebranding Square to Block and immediately rolling out several Bitcoin-related products (LDK, Lightning transactions on Cash App, new Bitcoin mining system). A few major aspects of the Bitcoin “ethos” are individual freedom, personal responsibility, and anti-censorship. It’s too early to tell whether Dorsey has completely bought into this ethos or if the censorship that developed at Twitter will follow him to Block. What is clear is that Block is hyper-focused on developing Bitcoin-related products.
Small Business Struggles: When we first wrote about Block in June of 2021, many small businesses were struggling to come out of the COVID-19 pandemic and economic policies that rendered many of them financially unstable. We expected this to have a negative impact on Block, particularly their business interface platform.
UPDATE: Generally speaking, economies in most states of the U.S. are re-opening. According to a Yelp review, 85% of the businesses that shuttered from March 2020 through the third quarter of 2021 are back up and running. In the third quarter of 2021, Block generated gross profit of $1.13 billion, up 43% year over year. Their Seller ecosystem generated gross profit of $606 million, up 48% year over year. Thus, it appears that this sector of Block is making a strong comeback. However, renewed worries over COVID-19 have led to further restrictions in large economic centers in the U.S., particularly in New York and California. Time will tell whether these worries reside or spread - if they spread, small businesses will likely struggle, which could hurt Block’s Seller segment.
Competition: From peer-to-peer payments to business transactions to buying Bitcoin, Block still faces stiff competition across all of their major segments. When it comes to peer-to-peer and small business transactions, Block must compete with apps like Venmo, Google Pay, Apple Pay, Strike, and Zelle. When it comes to buying, selling, and transferring bitcoin, Block must compete with the likes of Robinhood, Coinbase, Crypto.com, Strike, BlockFi and many others.
UPDATE: Recent announcements from Block indicate that they are developing and rolling out several new products and features that may give them a one-up on their competition. In Cash App, users can now transfer bitcoin on the Lightning Network, a layer-2 technology that improves transaction speed and lowers fees. For those not interested in Bitcoin-related features, Block also recently rolled out a free tax-filing feature on Cash App. In October 2021 Dorsey announced that Block was considering entering the bitcoin mining ecosystem. Last week, Block confirmed that they would be pursuing this venture and posted several jobs related to building a new bitcoin mining system. Given the recent spike in demand for bitcoin miners and their relative market scarcity, this could be an extremely profitable segment for Block.
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Have a great week everyone,
Brandon & Daniel
Disclosure: The article was written by Daniel Kuhman and Brandon Keys, and it expresses the author's own opinions. They are not receiving compensation for it. They have no business relationships with any company whose stock is mentioned in this article. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Brandon and Daniel are not financial advisors. We encourage all readers to do further research and do your own due diligence before making any investments.