Block Q1 Earnings: Don’t Let This Selloff Go To Waste

Summary Block, Inc. is a Strong Buy stemming from strong subscription & services performance and the likelihood of a bottom in its growth woes. The company is developing a full stack bitcoin mining platform, enhancing product velocity with open-source AI, and driving operating leverage in-house banking services. XYZ stock’s valuation is attractive, trading at extremely low multiples despite solid growth prospects and impressive operating efficiency. The market misunderstands Block’s bitcoin strategy, creating an asymmetric risk/reward opportunity as the company deepens its ecosystem and enhances financial accessibility. Shares of Fintech Block, Inc. ( XYZ ) cratered after the company reported weaker than expected earnings and slashed guidance . The report is definitely weaker than bulls like myself had hoped for, but it is illustrative of the challenging macro environment we are in. Despite this, I remain very optimistic about the company’s long-term growth runway and see the vision that they are building quite clearly. The negatives in this report are clear: slowing gross profit growth, downward guidance revision, no growth in Cash App card users or transacting actives, high stock-based comp expense, and slowing GPV (gross payment volume) growth. The market has plenty of reasons to punish the stock after this report, but I still see several reasons to remain optimistic. For one, management believes the bottom is in for gross profit growth and expects 12% YoY growth for 2025 as a whole. Meanwhile, the market is completely ignoring the ongoing profitability inflection Block is enjoying. The company demonstrated strong operating leverage in its subscription and services line item, growing revenue by over $200m YoY (+12.5% YoY) while segment COGS grew only 2%. Segment gross margin grew from 83.9% to 85.5% YoY. Segment contributions here grew YoY from both Square and Cash App, and I maintain the conviction that this line item is the future driver of Block’s growth. It’s the key to a sustainable profitability inflection for the company, and recent news regarding Cash App Borrow, discussed below, will begin driving strong operating leverage in this line item. Block’s highest margin segment is growing the fastest. This counts for something, despite the meager overall growth rates. Q1 Shareholder Letter Finally, management expects its first gross profit contributions from the Proto segment by year-end. This segment will capture sales of its bitcoin mining chip that is expected to begin recognizing revenue in 2H 2025. I wrote on Block earlier this year stating that the Bitcoin inflection is looming . I rated the stock a Strong Buy. The stock has underperformed the S&P (SP500) by a wide margin to date, and that underperformance is only widening in the post-market carnage. In this article, I stand by that rating. Core to my thesis is that Block is setting up critical infrastructure for an economy that sees increasing mainstream adoption of Bitcoin. The company is building a full stack bitcoin mining platform with an MDK (Mining Development Kit), a custom mining chip, and software to help more people access the bitcoin mining ecosystem. Although my previous rating has not worked in my favor to date, I maintain a strong belief that Block is a defining company in an era that is becoming increasingly friendly to cryptocurrency. I have a few other articles that are important to a discussion on Block’s crypto opportunity. Namely, my article on MicroStrategy Incorporated ( MSTR ), and my recent Strong Buy rating on Bitcoin USD (BTC-USD) itself. For all intents and purposes, MSTR stock is effectively levered bitcoin. Bitcoin USD ((BTC-USD)) itself, at current, is essentially a call option on geopolitical turmoil and the erosion of trust in the US Dollar as a neutral mechanism for global trade. There has never been such a structurally bullish time for Bitcoin, considering the current U.S. administration is weaponizing its consumer base and reserve currency. Meanwhile, that same U.S. president has been outspoken on his desire to make the United States the crypto capital of the world . New York City, the financial capital of the world, is hosting its first-ever Crypto Summit this month. This article will not focus so heavily on Bitcoin. Clearly, the market is unimpressed with Block’s maverick status within the crypto sphere, it doesn’t care about the company’s bitcoin accumulation, nor the fact that it enriches its user base by making bitcoin accessible, nor that it is becoming the first U.S. supplier of Bitcoin mining hardware. This misunderstanding by the market has led to a significant mispricing which is only exacerbated by today’s selloff. I’d point you to my three aforementioned articles for a deeper understanding of my position on this mispricing. My Take Block has received an enormous amount of criticism stemming mostly from its poor stock performance. Investors are losing patience with CEO Jack Dorsey and the company’s perceived lack of progress. While sales growth has stalled from the COVID-era boom, the stock’s valuation has fallen more than enough at this point to compensate. The company traded at only 13.5x forward earnings and 11.6x forward cash flow before the post-market selloff today. The valuation is even more attractive now. Analysts expect Block to grow EPS in the double digits for the next several years. Further, Block’s impressive operating efficiency is best illustrated by the fact that it generates over 180% more net income per employee than its sector peers. I believe now is a great time to either accumulate Block stock or initiate a position. For those unconvinced by the fundamentals of a compelling valuation, a growth reversal, and respectable efficiency, let’s talk about the product velocity we’ve seen out of the company this year. For one, Block is the only Fintech (to my knowledge) that is openly embracing and developing its own open-source AI model, dubbed codename:goose . This is powered by the company’s NVIDIA Corporation ( NVDA ) GB200 cluster. Internally, Block is using goose mostly for software engineering, but the potential for AI throughout Block’s ecosystem is very promising. Goose will contribute to ongoing increases in product velocity and innovation. Over time, the company can lean into goose for fraud analytics, streamlining loan approvals, marketing ad targeting, and helping Square sellers create websites and marketing campaigns. It noted in the shareholder letter that it wants Cash App users and Square sellers to have a personal CFO and COO at their fingertips. Further, there was news recently that is important for Block’s ongoing profitability inflection that went entirely ignored by the market. The company’s in-house bank, Square Financial Services (“SFS”), received FDIC approval to provide Cash App Borrow loans. The company had previously partnered with an external bank for its nearly $9b in origination volume for this product in 2024. Bringing the servicing of these loans in-house enhances Block’s unit economics by cutting out that intermediary. In other words, we can expect ongoing growth in the company’s subscription and services gross margin. Management also noted that they are open to selling these loans off their book to maintain flexibility with their available capital. Combining this improvement in unit economics with the company’s increased inflow and gross profit per user makes me confident they will continue growing subscription and services revenue and gross margin. The average Cash App Borrow loan was less than $100 and less than a month in duration in 2024. These are microloans aiming to replace payday loans which are outright predatory, considering they charge interest based on a fee structure , and have a clear product/market fit. Cash App Borrow has less than a 3% default rate historically. Very low risk. SFS has been servicing Square small business loans since it received its bank charter in 2021 and has seen solid success with its innovative repayment structure. Square sellers pay loans back slowly with a small percentage of each sale going to loan repayment. This greatly de-risks the company’s credit book from the lending perspective, makes the loan easier to manage for Square sellers, and makes credit more accessible for small businesses. Block also recently released enhanced cashflow management capabilities for Square sellers, including savings recommendations for prudent expense management, and launched a new unified interface for full stack point-of-sale services. It’s been a busy month of announcements for the company. Despite headcount reductions throughout 2024 , the company has actually increased product velocity. The company is operating with a renewed focus under the unified leadership of founder-CEO Jack Dorsey, and sits at three key inflection points with AI, the mass accessibility of financial services, and the proliferation of bitcoin as a means for cross-border settlement and as a modern savings vehicle. The market doesn’t seem to understand the operating leverage that Block is achieving through these handfuls of initiatives. This gives investors who recognize these enhancements a wonderful opportunity to accumulate shares in an innovative technology company with a very compressed multiple. Investor Takeaway Owning Block stock has been frustrating for the past several years. Many long-term investors have grown impatient with the company’s leadership and the lack of stock returns. I believe this only strengthens the bull case for the stock, considering we are at the point of broad-based market fear and capitulation in the stock. The company has been head-down and in the weeds driving product enhancements to better serve its growing customer base, while driving operating efficiency and enhanced unit economics. Broad-based weakness during Q1 and the ongoing uncertainty in Q2 drove weaker than expected results and guidance, and another frustrating selloff. I believe this selloff is a gift. The company is growing a durable extremely high margin segment in the double digits while deploying AI throughout its internal operations and products to increase innovation and value for customers. Further, the market seems to regard the company’s bitcoin aspirations as a distraction. I couldn’t disagree more. The company is becoming the first mining chip provider based in the U.S., the largest mining chip company is currently a Chinese chip designer, while deepening the accessibility of bitcoin throughout its ecosystem. Over time, as public perception of Bitcoin turns more favorable, Block will have several levers to facilitate the mass adoption of Bitcoin in cross-border trade, peer-to-peer payments, and retail transactions. The market is impatient with management’s lack of focus on short-term profitability growth. Instead, management remains focused on achieving its mission of enhancing the accessibility of the modern economy for all people. This has created very durable, sticky customer relationships with both low-income consumers and small-to-medium sized businesses. The obvious risk with this strategy is that these consumers and businesses are the most sensitive to inflation and recessionary macro conditions. Now, the company has shifted focus to deepening relationships with Cash App consumers, leaning more heavily into banking services for both Cash App and Square, and building the infrastructure on which the Bitcoin economy will operate in the U.S. There is much to look forward to in Block’s future. I maintain my Strong Buy rating despite the poor results from today.

Source: Seeking Alpha