Block (NYSE: SQ) could make a name for itself in the financial services industry. However, the shares have not been a winning investment.
This has been the case for the past five years fintech stocks is up only 32% (as of November 26). At the same time, the S&P500 has delivered a total return of 107%, more than doubling the starting capital.
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But where will Block be in five years? Could it finally start rewarding its shareholders better?
Block’s management team has been working to find ways to further strengthen the connection between Square and Cash App, likely as part of an effort to create a more powerful and independent payment system. This is advantageous because it is not as heavily dependent on dominant networks such as Visa And MasterCard.
The ideal transaction for Block is likely when a Cash App consumer purchases something from a Square merchant. The payment method could be Cash App Pay, which takes money directly from the user’s account. It could also be the Cash App Card or the buy now, pay later feature known as Afterpay.
In all of these scenarios, Block essentially pockets all or almost all of the transaction costs. As a younger fintech company looking to disrupt the payments landscape and come up with ways to bypass the major card networks Visa and Mastercard, and not paying them any fees is the goal.
As of September 30, there were 57 million monthly Cash App users and 24 million Cash App Cardholders. Additionally, Square processed gross payment volume of $59.9 billion in the third quarter. Considering its combined active card base of 7.7 billion and total payment volume (in the three-month period ending September 30) of $6.5 trillion, Block is still a very small fish in a huge pond.
Jack Dorsey, co-founder and CEO of Block, hasn’t been shy about vocally expressing his support for Bitcointhe world’s oldest and most valuable cryptocurrency. “I don’t think there’s anything more important in my life to work on,” he said in 2021.
This bullishness has resulted in a new strategic focus for Block. The company is working on several Bitcoin-related initiatives such as a hardware wallet, mining equipment and unique payment use cases to further strengthen adoption of the digital asset. As of September 30, Block owned $530 million worth of Bitcoin on its own balance sheet, with the first purchase taking place in 2020.
Critics might argue that this is a major waste of time and money, taking away from the core of what Block does.
However, the bulls will point out that Bitcoin is simply a natural extension of what Block is trying to do, which is increase financial freedom and boost economic empowerment. Should the price of Bitcoin continue to rise in the coming years and Block further develops new products and services that focus on this crypto, the overall business will only improve.
Block is a successful company with two nascent ecosystems that are becoming increasingly important to their users over time. In fact, the company is finally starting to see its profits rise, thanks to continued efficiencies that have been a key focus for the leadership team. Block is expected to post nearly $1.6 billion in adjusted items operating income in 2024, which would be an increase of 344% compared to last year.
The market is becoming more optimistic, offering a 24% upside on the shares in November alone (as of November 26). Even after these gains, the stock is trading at a reasonable valuation. Investors can buy shares at a price-to-sales ratio of less than 2.4. This is less than half of the average valuation of the past five years.
Based on Block’s trajectory, I wouldn’t be surprised if the stock outperforms the broader S&P 500 between now and the end of 2029.
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Neil Patel and his clients have no positions in the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin, Block, Mastercard and Visa. The Motley Fool recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.
Where will Block be in five years? was originally published by The Motley Fool
