Should Investing in Block's Shares be Considered?

The S&P 500 index keeps reaching new peaks, but it doesn't mean you can't find bargain stocks. One of those is Block (formerly known as SQ, currently at 2.29% decrease), which hasn't bounced back like the broader market and is still 75% off its all-time high price from over two years ago.

Block is working on sustainable growth and improved profit margins, a mission that will take some time to accomplish. The company has made significant strides, but is it enough for investors to jump on the bandwagon right now?

Cash App, Block's Most Popular Investment App

Block is renowned for facilitating money transfers, initially with the Square point-of-sale system. This tool helped small businesses manage payments and sales. A few years later, they introduced Cash App, allowing users to easily send and receive money, direct deposit funds, and even buy and sell stocks and Bitcoin.

Cash App has become a vital component of Block's business. Its investment features, in particular, have gained popularity among various age groups. According to a survey of 2,000 U.S. adults by our website's Generational Investing Tools, Cash App is the most frequently used investment app, with 38% of respondents using it. The usage is even higher among younger generations, with 54% of millennials and 50% of Gen Z utilizing Cash App for investing.

Block appears to be tapping into a market with younger generations, a move that should contribute to its long-term growth. However, the company needs to curb its expenses following a consistent decline in net income from 2019 to 2022. Additionally, Block aims to integrate all features from Square, Cash App, and Afterpay, their buy now, pay later platform.

Last year, CEO Jack Dorsey outlined a plan to optimize operations and boost efficiency. As part of this, Block established a goal to achieve the "rule of 40," implying that its gross profit growth and adjusted operating income margin will total 40% by 2026. To make this happen, Block has capped its workforce at 12,000, while cutting costs and enhancing profitability.

Block posted net income of $102 million in the fourth quarter, which increased to $472 million in the first quarter, with growth seen across both businesses. During this quarter, Cash App's gross profit grew 25% year over year to $1.26 billion, while Square's gross profit grew 19% to $820 million.

Keep an Eye on This

As digital payments become more prevalent, fintech companies are facing increased scrutiny from the federal government to combat fraud and adhere to anti-money laundering laws.

Block is reportedly under the lens of federal authorities, accused of compliance lapses in its Square and Cash App operations following allegations by a former employee. Investors should monitor this situation, as it could result in penalties or additional supervision, according to analysts at Macquarie. Although this could hike costs for the fintech, the analysts see no fundamental constraints inhibiting the types of business Block can undertake.

What's Next for Block?

Block intends to streamline its business and maintain a focus on efficiency. According to Dorsey, the company wants to offer customers interconnected tools and foster closer integration between Square, Cash App, and Afterpay. He stated, "We believe integrating the two ecosystems [Square and Cash App] enables us to provide consumer experiences that the competition cannot."

Bitcoin will play a significant role in Block's future strategies. In 2018, the company started allowing customers to buy and sell Bitcoin on Cash App. Today, it enables customers to round up transactions to purchase Bitcoin or gives sellers the option to convert up to 10% of their sales into Bitcoin.

In the first quarter, Cash App's Bitcoin gross profit was $80 million, on an increase of 59% compared to the same period last year. Block intends to continue investing heavily in Bitcoin's future success, allocating 10% of its Bitcoin gross profit to buy more Bitcoin. Dorsey has been a strong advocate for Bitcoin, and now Block's future prosperity will be tied to the cryptocurrency.

Should I Buy Block Stock?

Block is excelling in its cost-cutting and efficiency initiatives, as demonstrated by its consecutive quarters of net profit. Cash App is particularly popular with younger investors, which should benefit the company moving forward. Its heavy investment in Bitcoin might influence the stock's performance in the long run.

Investing in Block involves a bet on the company's efficiency strategies, as well as Bitcoin, and the stock is likely to exhibit heightened volatility. If you're comfortable with handling these risks, Block is a worthwhile stock to buy and hold for the long term.

Investors might be interested in evaluating Block's financial strategies, considering its significant investments in Bitcoin and its focus on integrating its various business components, such as Square, Cash App, and Afterpay. With a vision to provide interconnected tools and foster closer integration between its ecosystems, Block aims to offer unique consumer experiences.

Given Block's cost-cutting initiatives and impressive net profit growth, along with the popularity of Cash App among younger investors, investing in Block stock could potentially yield positive returns in the long term, especially if Bitcoin's future is promising. However, investors should acknowledge the heightened volatility associated with Block's stock due to its reliance on Bitcoin's performance and the company's transformative projects.