Some stocks are making massive upward moves. One of the biggest stocks going forward in 2021 was Block (SQ -3.98%). If you spent $250 in Block stock at the beginning of 2020 and held it until today, you would have about $294. If you sold it at its peak in August 2021, you would have had about $1,118.
Stock price movements can be expensive. Growth stocks are often overhyped and when that happens it pays to take some exposure off the table before it gets too far down the losing track.
But let’s say you’ve had Block all along and you’re wondering what to do with it now. What is your best option at this point?
Block develops its “ecosystem of ecosystems” in payments
Block was once known as Square, and was best known for its peripheral device that allows businesses to manage credit card transactions using a smartphone or tablet computer. The company changed its name at the end of 2021 because it wanted to be known for more than its iconic device.
Block CEO Jack Dorsey refers to the company as an “ecosystem of ecosystems” and has branched out its services into consumer applications as well as cryptocurrencies. Block’s offerings include Square, which focuses on business operations such as the card reader, and the Cash App, which allows individuals to send and receive money, as well as perform many other actions fintech. The company also owns Tidal, a video service, and TBD, an open-source platform for blockchain management and Bitcoin– related needs.
Cash App and Square are really the meat of the company, and Block has been working to connect them more effectively. Cash App started as an email product, but recently added a paper service, which opens the door to all kinds of other transactions such as trading shares or Bitcoin. At the end of September 2022, the Cash App card had 18 million users. Square is more than just a payment processor now; Companies that contract their services can do payroll, invoicing and customer relationship management. Companies that match wages through Square can allow their employees to get their funds via the Cash App. Block also acquired “buy now, pay later” company Afterpay in late 2021, which could help integrate Cash App and Square even more.
A pandemic darling returns to earth
Square stock was once a highflier, and has since come back to earth. In the first half of 2021, the stock increased fivefold before returning everything. Part of the reason for the strong performance was undoubtedly hype over Bitcoin, but also a firehose of liquidity courtesy of the Federal Reserve during the early days of the pandemic.
Block has had robust growth, especially if you remove Bitcoin revenue. Block counts Bitcoin revenue and costs on a gross basis, meaning it counts the sell side of a Bitcoin transaction as revenue and the buy side as cost. This makes revenues appear larger and compresses margins. The company generated $327.4 million in earnings before interest, taxes, depreciation, and amortization (EBITDA) in the third quarter of 2022, which was a 40% increase compared to a year ago. On a trailing 12-month basis, the company earned $894 million in EBITDA. This sounds good, although the company has a market capitalization of $ 43 billion, so earnings need to grow a lot to catch up with the multiplicity.
Operating leverage is the key
The future of Block It will largely depend on whether you can increase margins as you grow, which is called operating lever. The company has spent a lot of money on acquisitions and investors are eager to see more growth in the bottom line as well as the top line. Block’s chart correlates quite closely with Bitcoin, so investors need a strong stomach to ride the changing changes in sentiment for the crypto. Block will certainly continue to grow and perhaps its ecosystem of ecosystems will dominate financial transactions going forward. Whether that means the shares will rise from here is anyone’s guess.