Block: Out Of Favor, Not Out Of Play

Summary Block’s valuation is deeply discounted, pricing in macro and competitive headwinds, creating a contrarian buy opportunity for patient investors. Despite weak user growth and competition, XYZ’s core businesses show resilience, with steady per-user engagement and strong brand stickiness in SMBs. Operating margins are improving, and the balance sheet is healthy, despite high stock-based compensation and Bitcoin-driven revenue volatility. Significant crypto exposure adds risk but also hidden upside; if sentiment turns, Block’s multi-narrative model could unlock asymmetric long-term gains. Since the tariff selloff, Block ( XYZ ) has not meaningfully recovered along with the wider market bounce back. Valuations are looking reasonable to initiate a contra buy! The core thesis is that while the valuations are discounted structurally on real weakness in both consumer and SMB segments, the markets have priced much of the downside and hidden optionality could now provide long-term upside potential. In a highly disruptor-friendly and competitive space, Block is facing near-term headwinds and does not seem to have the right narratives that are likely to be rewarded right now. It does not seem to be quite the defensive you are looking for to ride the macro headwinds, nor the innovation-friendly positioning that is drawing risk capital. But that is exactly what opens up a contrarian window – the multi-narrative model of crypto fintech, consumer app, banking solution as well as a PoS may seem divergent now, but offers deep embedded optionality. Core Weaknesses With Hidden Optionality Poor growth in the Cash App active user base has been plaguing Block well before the recent tariff uncertainties and consumer spending headwinds – there is nothing new about a stagnating user base. In fact, there are green shoots being ignored by the markets. The historical financials data from Block show a steady inflow per user growth though (8% YoY in Q1 2025) suggesting underlying engagement is holding up. There are limitations to scaling monetization due to a customer base with lower income levels, but this is also a segment with room for digital financial inclusion, a longer-term structural theme to which Block remains exposed. The revenue stream is still heavily bitcoin reliant, which adds volatility to earnings, but also offers optionality if crypto sentiment stabilizes. Newer forays like Afterpay and micro lending are yet to show topline support, but the optionality of new offerings is still very much in play, particularly as the ecosystem matures. Active User Growth Cash App – XYZ (Image created by author using data from XYZ Financials) Block’s Square merchant business is witnessing rising competition from platforms like Toast, Stripe, and Shopify. All three peers are targeting small and medium-sized businesses with payment processing and associated services (core areas where Square previously held a clear lead). While not identical in terms of the business segments they serve, all of them overlap with Square’s target segments. This competitive pressure is real, but so is Block’s brand equity and product stickiness in its core SMB user base. Block’s concentrated exposure to small businesses does make it vulnerable to macroeconomic shocks like tariffs and cuts in consumer discretionary spend. But the valuations seem to have baked those headwinds in, investors willing to ride out the temporary drags will likely see eventual easing in consumer stress rerating Block quickly. Operating Margins Improving, but SBC Remains a Drag A key drag on margins is persistently high stock-based compensation, accounting for ~15% of gross profits. All is not gloom and doom, though. The operating margin is showing improved numbers in the past few years, supporting leverage in XYZ’s business model as it scales. Block’s balance sheet remains healthy, with sufficient liquidity to weather short-term volatility. Data by YCharts Data by YCharts Data by YCharts Valuation Bottom Forming? Block’s current valuation looks reasonably cheap on a metric like EV/Revenue. Although significant revenue comes in from Bitcoins, the contribution has been relatively stable throughout. While the EV/Revenue ratio in isolation may look more discounted than it is due to the Bitcoin revenues, its steep discount relative to its own history is still valid. The market appears to be assigning a structural discount to reflect concerns around user monetization cap and competition in both consumer and merchant ecosystems. Short term macro headwinds make the story unfavorable to deserve a rerating soon, but the discounted valuations look like having priced in much of the downside already. Contra buys now could gain asymmetrically if there is a narrative change or even minor investor confidence comes back on better than anticipated growth. Data by YCharts The P/Gross Profit Ratio underlines the multi-year valuation discount even better. Recent corrections have brought the P/GP ratio down from 6.3x to ~4x, near the trough of all-time lows. P/GP ratio – XYZ (Image generated by author using data from Seeking Alpha and XYZ Financial Files) The Bitcoin Distraction Comes With Optionality Block has an outsized exposure to crypto, particularly Bitcoin. Trades through Cash App are recorded fully as revenue but with minimal contribution to gross profit. In Q1 2025, Bitcoin revenue was again a dominant share of total reported topline (in the typical range of ~40%), yet contributed ~2% in gross profit on revenues generated from Bitcoin. However, it takes getting used to the structure to see the hidden optionality beneath. Beyond trading platforms in the Cash App, Block has further crypto ambitions, including its self custody wallet (Bitkey) and open-source platform (TBD). Although these remain early-stage and non monetized. That along with a decentralized finance (DeFi) focus for the future opens up optionality. I think the crypto narrative is a double-edged sword and particularly concerning when we look at peer fintechs like PayPal downsizing their crypto bets, shifting focus back to core payments and engagement. However, if the crypto cycle turns decisively bullish, Block stands to gain from its contra positioning. Contra Buy on Valuation Alone Block isn’t an obvious buy in today’s market, but that’s the point. While narratives are divergent and risks real, the stock is trading as if none of its embedded optionality matters. With valuations trading at multi-year low, particularly after the tariff sell-off, this feels like a setup where even small tailwinds on macro, crypto or product could reprice the story quickly. For those willing to be early and patient, the contrarian reward risk looks compelling for a Buy.

Source: Seeking Alpha