After Earnings, Is Block Stock a Buy, a Sell, or Fairly Valued?

Block released its third-quarter earnings report on Nov. 7. Here’s Morningstar’s take on Block’s earnings and stock.

Key Morningstar Metrics for Block

• Fair Value Estimate: $90.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Very High

What We Thought of Block’s Q3 Earnings

• Block’s third-quarter earnings largely mirrored what we saw from the company in the second quarter. Management continues to make strides in improving profitability, and we remain encouraged by this shift in focus. We will maintain our fair value estimate of $90 per share and see the stock as fairly valued.
• The Cash App side of the business remains the strongest engine. Revenue growth was weighed down by flat bitcoin revenue, but year-over-year gross profit growth was 21%, up slightly from the previous quarter. We think Cash App’s growth prospects remain strong, but we also see the long-term economics of this business as highly uncertain.
• Square delivered year-over-year revenue growth of 8%, driven by 8% growth in gross payment volume. While we have seen growth for Square slow this year, this appears to be partly due to a shift to a more profitable business, as gross profit increased 16% year over year. On the positive side, management noted an uptick in volume growth in October and said they expect it to improve in the fourth quarter.
• Adjusted operating income for the quarter was $444 million, compared with $90 million last year. Excluding bitcoin revenue (essentially a pass-through), adjusted operating margins for the quarter would be 12.5%, which we view as a solid result for a company that has historically struggled to earn a profit.

Fair Value Estimate for Block

With its 3-star rating, we believe Block’s stock is fairly valued compared with our long-term fair value estimate of $90 per share, which equates to 25.7 times adjusted 2024 earnings. While a decline in bitcoin revenue was recently a source of revenue volatility, we forecast strong growth over time, with total revenue growing at a 12% compound annual growth rate over the next five years and 11% over the next 10. We project seller revenue to grow at a 10% CAGR over the next 10 years. We expect growth in Cash App to be stronger, and for this area to be a more critical growth engine. Excluding bitcoin revenue, we project Cash App revenue to grow at a 16% CAGR over the next 10 years.

Read more about Block’s fair value estimate.

Economic Moat Rating

Payment processing of any type is a highly scalable business. Once a payment platform is established, there is little incremental cost to additional transactions. As a result, a handful of acquirers have come to dominate the industry. However, these traditional players left some areas open for new competition. Square, Block’s acquiring business, initially rose to serve micro merchants, which are economically unviable for larger acquirers because of low volume. We think Square’s business model—characterized by efficient client onboarding, innovative point-of-sale devices, flat fees, and an internally developed and integrated set of software solutions—lets it effectively reach and retain these merchants.

Square has seen dramatic growth over the years, and while it has not been consistently profitable, we think the company’s position in its niche is solidified and that it’s nearing the point where it can generate attractive returns over time. We see the future for Cash App as less certain, but we see the potential for a moat over time. Taking these two businesses into account, we award Block a narrow moat.

Read more about Block’s economic moat.

Financial Strength

We think Block is in a solid financial position. Historically, it has avoided carrying a meaningful amount of debt. This seems appropriate since the company remains unprofitable. However, Block had almost $6 billion in debt on the balance sheet at the end of 2023. Relative to our expectations for profitability going forward, we see this as reasonable.

Read more about Block’s financial strength.

Risk and Uncertainty

Block is a fast-growing, highly scalable business, which creates a wide range of possibilities. This is the primary factor behind our Very High Uncertainty Rating. Because Block’s revenue is directly tied to revenue from its merchant customers, it is sensitive to macroeconomic conditions, and its focus on micro and small merchants magnifies this dynamic, as small merchants can fail in large numbers during recessions. We think the demonstrated eagerness for products such as Instant Deposit and Square Capital suggests its client base might be fragile.

The company’s rise has largely happened in an improving economy, although its performance through the covid-19 pandemic was reasonably solid. Square’s international operations also present currency and execution risk.

Read more about Block’s risk and uncertainty.

SQ Bulls Say

• The ongoing shift toward electronic payments has created (and will continue to create) room for payment companies to see solid growth without stealing share from each other.
• Ancillary services are becoming a more critical engine for growth and will help Square fully monetize its merchant client base and improve margins.
• Electronic payment growth is shifting overseas, and Square’s business model looks portable into international markets, as the company does not rely on a large local sales force to attract merchants.

SQ Bears Say

• Square’s focus on micro and small merchants increases its macroeconomic sensitivity.
• Square has not yet shown that it can convert its strong growth into better profitability.
• Square’s relatively high pricing will likely limit its eventual market penetration.

This article was compiled by Sokhoeun Noeut.