Monitor to monitor when Block is reporting revenue

As To block (NYSE:SQ) begins to expand its offerings, it takes more risks and becomes a more indebted company. In this segment of “The Future of Fintech”, recorded on February 3Motley Fool contributors Matt Frankel, Jason Hall and Danny Vena share their concerns about how effectively Block can move forward with a consistent strategy.

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Matt Frankel: As you can see, Block or Square, it’s still okay to call it Square I think until they change the ticker symbol. But it’s down about 58% in the past three months. This is a very big drop for a big company like that. It’s worse than PayPal’performances. It is sold on the heels of PayPal’s revenue. We want to review what we are looking for and what we will be watching for when they report their income shortly.

A few little things here. Block, they just finished acquiring Afterpay, which we’ll talk a bit more about in the buy now, pay later space and already made available to their merchants to integrate into their platform. I want to hear your opinion on what this means for the company. I’m looking to see a banking update. Remember that Square got a banking charter not too long ago and created its own bank called Square Financial Services. It is its banking subsidiary. If you remember the Square Capital business lending platform. It is now called Square Lending. It’s part of their bank.

In the third quarter, they didn’t make any money. But Square doesn’t really care about profitability at this point, unlike PayPal. Their net income was zero, to be exactly was $0.1 million. Which in the context of Square looks like nothing. Their gross profit increased 43% year over year. But they choose to invest most of their money in the business. There is still an all-out growth mode unlike PayPal. Their gross payment volume was just over 45 billion. Remember, PayPal was around 1.3 trillion annualized. That equates to about 180 billion annualized, so a significantly smaller company. This has increased by 92% year over year. But remember this is relative to the COVID lockdown period. Square has a disproportionate exposure to brick-and-mortar retail unlike PayPal.

Cash app revenue grew 33% excluding Bitcoin. Remember that bitcoin technically represents the bulk of Cash App’s revenue, but it’s just bitcoin that is bought and sold by customers, not necessarily anything related to profit. They get a small percentage out of it.

Square has nearly seven billion dollars in cash sitting on its balance sheet. Which, for a company that’s now valued at, say, around $60 billion, is a pretty impressive stash of cash that it can use at this point. They have been very active with acquisitions. Afterpay was an all-stock deal, but they also acquired the title, if you recall. They have made a few add-on acquisitions over the years and continue to do so. Guys, we can start with Jason, I guess, what are you looking at when Block releases his earnings? You already call him Block?

Jason Hall: I’m not ready to call it Block yet [laughs] I’m working on that. But I’ll get there eventually. There are a couple of things I want to quickly point out to underscore what you were talking about. Sure, this company doesn’t consistently generate GAAP earnings, but it’s been cash flow positive for over five years now. I think it is important. He’s got a ton of money, but he’s also got quite a bit of debt. I think it’s really about effectively managing the balance sheet. I think that’s really important.

What I really want to get a better idea of ​​is how they plan to monetize. They put their fingers in a lot more pies. The Afterpay agreement, we have already talked about it. Not just monetization, but also continuing to integrate these things because you have all these disparate parts of the business and there are interrelated aspects, but not always. I mean, Cash App doesn’t need to be tied to Square at all. In fact, it’s possible to use Cash App completely outside of the Square ecosystem. That’s a plus, because it can allow it to participate in more ways that people exchange money.

But my biggest concern, I think, is renaming the Block company to separate Square’s branding. Is Square like the merchant payment platform and all these merchant services they provide I really want to get a better idea of ​​what their cohesive strategy is I guess that’s what I try to say it in a somewhat coherent way. My concern, frankly, is that Jack is so biased towards bitcoin in his overall view of economics, finance, and money. How many other voices in the room will support the company’s cohesive strategy? Will it be able to be effective in allocating capital?

I think they spent way too much money on Afterpay. They can’t be fast and loose. Because basically, what are we talking about, about two and a half billion dollars of net cash on the balance sheet. Again, it’s not a question of exactly what the balance sheet looks like now, as the Afterpay deal is closed, it will still be around three weeks before we see the actual balance sheet at the end of the fiscal year. I just have legit questions about what the consistent strategy will be and as you get more stuff and take more risk because this Afterpay stuff means it’s going to be a more leveraged business, at what how effective are you going to be with your strategy? I really want to see what it looks like and what management says. I mean, I’m not even as concerned with results as I am with strategy, Danny.

Danny Vena: I want to come back to one of the things you said. I’m going to share my screen here just a minute to look at it.

Jason Hall: I’m amazed you could pick one, I said like 30 things and none of them very well.

Danny Vena: [laughs] Well, that’s the one that really stuck with me. This is from Square Q3 and you notice I called it Square so I’m not ready to call it Block yet. I don’t think they thought about the implications of the term Blockhead when they renamed this company.

Jason Hall: I shared Charlie Brown’s gift sniffing about football the day the announcement was made by the way.

Danny Vena: My brain went straight there. When you look at what has happened over the past few quarters, every time the cryptocurrency has been torn apart, Block’s revenue has done well. When the cryptocurrency was down the toilet, Block’s earnings didn’t do as well. If you look at this little footnote here at the bottom of page 2, it says that in the third quarter, total revenue was up 27%, and excluding bitcoin revenue, total revenue was up by 45%. During the third quarter, the cryptocurrency was doing very well. Now things slowed down a bit in the fourth quarter and got even worse in the first quarter.

I remember an article I wrote several quarters ago where when you look at Square’s organic growth excluding bitcoin transactions it was much lower, Cash App’s growth, that at which Square has been hanging its hat for years saying this is our big area of ​​growth. This growth was tepid when you exclude all bitcoin transactions. I think one of the potential pitfalls for Block and Square’s Cash app is if there’s a significant slowdown in bitcoin transactions. I think we see the selling part of that. Then I think there will be a lull and during this lull there will not be as many cryptocurrency transactions. I think you’re going to see Square’s total revenue fall off a cliff, primarily because of cryptocurrency. The company is going to have to try to compensate for this inorganic growth and I think that’s a difficult thing to do.

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Danny Vena owns Bitcoin, Block, Inc. and PayPal Holdings and has the following options: Long January 2024 $95 calls on PayPal Holdings. Jason Hall owns Bitcoin and Block, Inc. Matthew Frankel, CFP® owns Block, Inc. and has the following options: $200 short calls in January 2024 on Block, Inc. The Motley Fool owns and recommends Bitcoin, Block, Inc., and PayPal Holdings. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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