Has Jack Dorsey Doomed Another Company?

Jack Dorsey cofounded Twitter in 2006. 

The company reported net losses most of the years since it went public in 2013. 

In 2021, Dorsey left Twitter to focus on his other company Block (SQ). It’s a fintech company that provides financial services, including debit cards and cryptocurrency-based products and services. 

Like Twitter, Block is losing money. 

Interestingly, while financial pros’ searches for Twitter and Tesla, they declined for SQ through December, despite heavy retail spending.

Sometimes it’s the lack of searches that catches our attention.

From 2019 to 2021, the company posted positive net income. 

However, over the last twelve months, that dropped to -$503.7 million. 

Has the stock absorbed all the bad news? Or is there more pain ahead?

Block’s Business

Block’s portfolio includes Square, Cash App, Spiral, TBD, and Tidal. 

Block offers sellers an integrated ecosystem of commerce solutions, business software, and banking services. 

Cash App is a mobile payment service that allows users to transfer money to one another through its app. 

In Q3 2022, SQ generated a gross profit of $1.57 billion, up 38% YoY. Cash App alone generated a gross profit of $774 million, up 51% YoY, and Square generated a gross profit of $783 million, up 29% YoY. 

The Cash App card had nearly 18 million active monthly users last September, up 35% from Q3 2021. 

Block’s ability to serve all types of clientele is paying off. Its gross profit for vertical point-of-sale solutions grew more than 45% YoY in Q3 2022. 

Thanks to its acquisition of Afterpay, Square sellers can now offer buy now, pay later to customers. 

The company also owns the streaming music service Tidal. It’s still uncertain what role it’ll play in the business.  

Financials

Source: Stock Analysis

Block’s revenue growth has exploded from $3.3 billion in 2018 to $17.7 billion in 2021. 

But over the last 12 months, revenues fell to $17.0 billion. 

That’s not a substantial drop, but investors may worry the company’s expenses are rising. Over the last 12 months, SG&A and R&D expenses jumped from $2.6 billion to $3.4 billion and $1.4 billion to $1.9 billion, respectively.

This turned the firm’s operating income negative. It went from $166.2 million in 2021 to -$543.8 million in the last 12 months.

The firm’s financials are stable, though. Its current ratio is 1.8x. In addition, it’s generating positive cash flow, with operating cash flow at $324.8 million. 

Adjusted EBITDA contributed positively to the company’s cash balance during Q3 2022. 

It’s worth noting Block’s cash balance dropped some because it repaid Paycheck Protection Program Liquidity Facility advances. 

Valuation

Source: Seeking Alpha

Unprofitable tech stocks got absolutely crushed in 2022. SQ was no exception, as shares dropped more than 60%. 

The company still isn’t profitable and has no P/E GAAP ratio. 

Meanwhile, its peers do have P/E GAAP ratios. Fidelity National Information Services (FIS) is at 45.1x, Global Payments (GPN) is at 418.0x, Fiserv (FISV) is at 32.1x, and PayPal Holdings (PYPL) is at 38.7x.  

SQ looks attractive from a price-to-sales perspective at 2.2x, compared to FIS at 2.9x, GPN at 3.3x, FISV at 3.8x, and PYPL at 3.2x. 

Block ended Q3 2022 with $7.1 billion in available liquidity, with $6.5 billion in cash, cash equivalents, restricted cash, and investments in marketable debt securities, and $600 million available to withdraw from its revolving credit facility. 

Profitability

Source: Seeking Alpha 

While Block does generate cash from its operations, its $324.9 million is far less than its peers, FIS at $3.9 billion, GPN at $2.3 billion, FISV at $4.3 billion, and PYPL at $6.4 billion. 

Moreover, its gross profit margins of 32.7% are lower than its competitors’. For example, FIS is at 38.7%, GPN is at 57.6%, FISV is at 52.7%, and PYPL is at 42.9%. 

SQ’s net income fell $15 million in Q3 2022. But the company’s looking to improve net income based on the quarterly statement.

Source: Block

Growth

Source: Seeking Alpha 

Block has had exceptional revenue growth over the last three years at 57.6%, significantly higher than its peers, FIS at 16.5%, GPN at 32.8%, FISV at 31.2%, and PYPL at 16.7%.

But this growth slowed dramatically over the last year to 1.3%, while SQ’s competitors have grown faster. Over the last year, FIS grew revenues 7.1%, GPN 8.0%, FISV 9.9%, and PYPL 10.1%. 

The firm did post strong growth numbers in Q3. Gross profit rose 38% YoY to $1.57 billion, with Cash App and the Square ecosystem leading the growth. 

Our Opinion 4/10

Block showed some promise after its Q3 results. 

But the company is in a very competitive market. It’s up against other fintech companies like PayPal and Coinbase, as well as traditional financial institutions such as banks, credit card companies, and firms that offer debit cards and payment processing.  

The stock’s valuation is still rich, despite shares’ nosedive in 2022. 

We’d like the company to have a few more strong quarters and investors to be more bullish on the industry before we consider Block a buy.

Right now, it’s a better stock to trade than to invest in.

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