Block Shares Surge 40% After Stellar Q3 Results: Is It Time to Invest?
Block (SQ 3.39%) shares have experienced a remarkable upward trajectory in the past few weeks, soaring approximately 40% following the announcement of its impressive third-quarter results. The company reported revenue of $5.6 billion and adjusted earnings per share of $0.55, both of which exceeded the expectations of Wall Street analysts. Unsurprisingly, investors were immediately filled with optimism.
However, when we take a step back and examine the bigger picture, the outlook isn’t quite as rosy. As of now, Block shares are down about 80% from their peak in August 2021 and have declined by 8% this year, failing to participate in the broader market’s rally in 2023.
Given these circumstances, should investors consider purchasing this popular fintech stock while it’s experiencing a downturn? Let’s delve deeper into Block and analyze its potential for growth.
Square, the segment of Block that focuses exclusively on serving merchants, witnessed a 15% year-over-year increase in gross profit, reaching $899 million in the third quarter. This innovation-driven division continues to impress, having recently introduced new features aimed at addressing the evolving needs of its clients.
For instance, Square for Franchises was launched to assist multi-unit sellers in managing their complex requirements. Management highlighted that franchises in the U.S. generate approximately $860 billion in revenue annually, thereby expanding Square’s addressable market.
Furthermore, the company’s leadership team introduced new artificial intelligence (AI) features in October that automate various processes for its merchant base. One such tool, the Menu Generator, allows restaurants to swiftly upload their menus onto the platform.
On the Cash App side, Block’s consumer-facing personal finance mobile app, growth was even more robust. Gross profit surged by 27% to $984 million in Q3, and Cash App now boasts 55 million monthly active customers.
A pivotal product within this segment is the Cash App Card, which functions as a Visa debit card issued by Block. With 22 million monthly active users, management views this card as a gateway for consumers to access other financial services products. The ambitious objective is for Cash App to replace traditional bank accounts for numerous individuals. Through the app, users can set up direct deposit, send or receive money, invest in stocks, and even avail themselves of short-term loans.
In a departure from past shareholder letters, Block’s CEO and co-founder, Jack Dorsey, commenced the Q3 2023 letter with significant remarks for the company’s shareholders. Dorsey emphasized Block’s renewed focus on endeavors that can generate substantial value for customers and shareholders over the long term.
The CEO outlined his vision for Block to achieve the rule of 40 by 2026, whereby the combined annual growth rate of gross profit and adjusted operating margin surpasses 40%. Additionally, Block announced a $1 billion share repurchase program.
To improve efficiency across the board, Dorsey revealed that the company would maintain a strict limit of 12,000 employees until faster growth is attained. Despite Block encompassing four ecosystems under its umbrella (Cash App, Square, TBD, and Tidal), resources will be more centralized and shared among these groups to eliminate redundancies and wasteful activities.
Dorsey aims to strengthen the connection between Cash App and Square to harness powerful network effects. A noteworthy endeavor involves enhancing engineering productivity by developing generative AI tools for customers.
Shareholders should find encouragement in these statements from Block’s CEO, as they signify a reinvigorated sense of urgency and focus that could propel Block to new heights. However, it remains crucial to closely monitor progress in all these areas, although the outlook is undeniably optimistic.
Considering the stock’s significant decline from its peak price, investors should carefully deliberate adding Block to their portfolio at this juncture, with a long-term investment outlook in mind.
