Business Description
Block, formerly known as Square, is a financial technology. It has two main products:
1. Square for retail sellers: Provides an ecosystem of integrated hardware, software, and financial services solutions primarily tailored to businesses. This includes point-of-sale hardware, software for managing inventory and customer relationships, payroll services, and business financing options. Square is also one of the biggest payment processors behind various consumer brand products (think Google, Apple, etc), similar to Braintree by Paypal.
2. Cash App for consumer financial services: Offers a suite of financial tools for individuals within a mobile app. These include peer-to-peer payments, the ability to buy and sell stocks and Bitcoin, a debit card linked to the app, and a tax filing service. Cash App aims to provide easy and accessible financial services to individuals, especially those who might be underserved by traditional banking systems
It also has a side-business related to the Bitcoin system: bitcoin mining, bitcoin wallets, bitcoin buying and selling, tools to build applications on bitcoin transactions, etc.
While the company starts with Square, its gross profit mainly comes from Cash App:
While I believe Square is a stickier business, Cash App is the main growth of the profit of the company, so this breakdown is not bad.
Given the light asset model, once the profitability hits an inflection point, it grows very quickly. It happened in 2023 Q2:
And the company still has room to grow:
SWOT analysis
Strengths
Square has a sticky client base given it's hinged in the commerce side of a business. Its marketing and analytics solution also gets better with more payments processed by Square for the merchant.
One-stop shop for all hardware and software for small and medium businesses to monetize their businesses by accepting payments, managing orders, etc.
Cash App, while not super sticky, gives convenience to consumers that not many other good alternatives. It has done a lot of things right to be the number one finance app in the Apple App Store. Once a relationship is built, revenue for a particular user keeps growing without Block needing to do much. The app also gives more cross-sell opportunities to Block.
Weaknesses
Do not have much pricing power due to similar products offered by competitors.
Opportunities
Block bet big on bitcoin transactions, which may really take offer, and Block would have first mover advantage on having the knowledge in using bitcoin for commerce.
Threats
May not be deep enough in particular industries, which got Toast to boom despite Square was already popular in the restaurants industry.
While payment processing is sticky and the barriers to entry is non-trivial, the switching cost is not high enough, so the competition is intense.
References
2024 Q2 investor presentation
2024 Q2 Shareholder letter
2024/07/01 7 Reasons To Buy Block by Riyado Sofian
Updates
2024/09/03 Valuation
Given the company has already hit an inflection point in profitability, with over $1 billion free cash flow annually, and growing its gross profits at 15+%, and 10-15% for the next few years, I would give it a P/E multiple of 20 on the expected adjusted EPS.
The company is expected to earn $3.54 this year, and $4.5 next year, so a buy below price is about $80.
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