Block’s Quality Business Overshadowed by its Bitcoin Holdings

Jack Dorsey’s belief in blockchain technology led him to transform Square into a blockchain-centric company.

The problem is they don’t do much other than invest in Bitcoin.

That’s pulled the focus away from payment processing and brought a history of rapid growth to a screeching halt.

And let’s just say financial pros aren’t impressed.

Despite being the second most-searched payment processor stock last month, as per Trackstar data, searches by major investors have declined over time.

It’s challenging to accept that Dorsey’s focus on blockchain overshadows an otherwise robust business, as explained below.

Block’s Business

Once known for its mobile credit card square dongle payment processor, Block (formerly Square) has grown into a full-blown financial services company.

They offer a suite of hardware and software tools that enable seamless card payments, inventory management, sales tracking, and accessing loans.

Since 2015, Block has offered Cash App, a user-friendly peer-to-peer payment service. 

Lastly, Block holds a significant amount of Bitcoin. This is used as both an investment and to facilitate transactions.

It’s also worth noting that Block is focused on creating a decentralized exchange for Bitcoin and other cryptocurrencies and supporting other blockchain app development.

Block segments its business in several ways.

First, it breaks revenues down by type:

Source: Block Q3 2023 Shareholder Letter

They then provide the same information by product:

Source: Block Q3 2023 Shareholder Letter

Financials

Source: Stock Analysis

Block’s revenue growth has been nothing short of outstanding, with YoY numbers close to 50% before the pandemic that soared to over 100% during 2020.

However, this hit a brick wall in 2022 when revenues flatlined.

Why?

Their Bitcoin holdings cratered as the price of Bitcoin faltered.

On paper, the company hasn’t turned a profit since 2019 other than a few quarters here and there.

However, they generate significant cash, ranging from $175 million to nearly $1 billion.

Block carries very little debt, roughly $5.4 billion, but has $6.3 billion in cash.

Valuation

Source: Seeking Alpha

Because of its Bitcoin holdings, Block is tough to value.

Well-known credit card companies like Visa (V) and Mastercard (MA) trade at 24.6x and 35.0x cash, respectively, while Block trades at 42.2x cash, which isn’t too shabby.

Even Block’s 41.7x non-GAAP P/E ratio isn’t much higher than Mastercard’s 34.8x.

But, Paypal (PYPL) trounces them all if you’re looking for a stock trading at a discount.

Growth

Source: Seeking Alpha

Current forecasts put Block’s revenue growth at just 11.5% YoY, lower than Mastercard’s 14.1% and well below Toast’s (TOST) 41.6%.

This slowdown is a big reason shares of Block took it on the chin this year.

Profitability

Source: Seeking Alpha

As we noted earlier, Block doesn’t appear profitable on paper. But they generate cash.

With its volatile business plan, it’s tough to say whether it’ll do better next year or not. The entire performance could rest on the price of Bitcoin.

Our Opinion 4/10

While we like Block as a company, including its business model and operations, we aren’t fans of the Bitcoin holdings.

If someone wants to invest in Bitcoin, let them. Don’t turn your company into a proxy for the cryptocurrency.

With growth slowing down, we’d pass on Block altogether, instead focusing on Visa or Mastercard.

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