Block (SQ) Stock Analysis & Forecast

Investing
Updated: 8th Jan 2022
Written by Sean Graytok
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Block (formerly Square) is a $75 billion company taking on the legacy payment and banking institutions and is one of the best fintech stocks around.

But is SQ a buy? Find out in the Block Stock forecast and analysis.

What is Block?

Block, formerly known as Square, is a global financial service, and mobile payments company co-founded in 2009 by Jack Dorsey, who also co-founded Twitter.

Block became popular amongst small businesses because of its white credit card reader and payment terminal, in addition to providing business insights that enabled merchants to look under the hood for the first time.

Before Block, it was illegal for non-registered merchants to accept credit card payments, and the registration process was too costly and difficult to complete.

Today, Block is one of the biggest players in financial technology, or “fintech”, and the first to obtain an FDIC charter to operate its own bank as an Industrial Loan Company (“ILC”).

Block’s Cash App has more than 36 million monthly active customers and is overtaking PayPal’s Venmo as the most used mobile payment service.

Block is contributing to and has benefitted from Bitcoin’s rise, allowing its Cash App users to easily buy and sell it since 2017. 

But this company is more than a “neo bank” or mobile app — let’s examine Block’s investment potential.

Block Stock Forecast: The Bull Case

#1. Vertical Integration

Block is Wall Street’s favorite fintech company because it facilitates both sides of the transaction — millions of merchants use its Point-of-Sale (POS) hardware and software and even more use its Cash App.

Block collects a 2.6% + $.10 processing fee on every single transaction its POS devices handle. As the leader in this niche, that’s a lot of money.

ARK analyst Maximilian Friedrich calls Block the “holy grail of payments” because it creates a closed-loop payment system that cuts out intermediaries — i.e., traditional banks.

This gives the company a larger share of the economics at play and more opportunities to cross-sell services between and among consumers and merchants.

In addition to streams of recurring revenue, investors love companies that pursue vertical integration.

#2. Real-time Business Intelligence

Unlike a traditional bank that only sees end-of-month or end-of-quarter income statements from a merchant, Block sees every transaction that happens in real-time.

This level of business intelligence enables Block to see when the business is thriving, its rate of sales, and its prospects for growth, among countless other insights.

The company can take this information and offer working capital loans or payroll services, which further embed it into the fabric of the business it serves.

#3. Global Expansion

Block is also physically expanding its reach — it has offices in the U.S., Canada, Japan, Australia, Ireland, Spain, and the UK and its growing presence in Africa.

Block’s early adoption started in the Southern, more “unbanked” areas of the US and quickly spread across the country.

Today, the company is applying this strategy globally and providing payment rails for emerging markets around the world.

#4. Digital Wallets and Crypto

Block’s CEO Jack Dorsey believes that cryptocurrency, specifically Bitcoin, will transform the payment industry at home and abroad — a change he’s witnessing first-hand in developing countries.

Block is positioned to enter virtually any new market as digital wallets and bitcoin adoption continues to increase.

We believe that the Cash App has “Super App” potential given its sticky user retention, network effect, and established position to benefit from the “financialization of everything.”

>> More: Best Fintech ETFs

Block’s Economic Moat

Block’s advantage over its competition is its network effects as a peer-to-peer payment provider — this attracts loyal users to its platform and encourages re-engagement with its app.

For example, users can be lured back to the Cash App after months of inactivity by friends requesting repayment after a night out.

The social incentive to have and use the Cash App accelerates adoption. It makes it as sticky, if not more, than social media platforms.

Does it really matter if your friends can’t tag you in a picture at the bar? How about if you can’t pay them back for the three beers because you don’t have the same P2P payments app?

Combining Block’s organic network effects with its vertical integration makes it most suitable to seize the digital wallet opportunity.

>> More: Join The Motley Fool Stock Advisor & see their top 10 stocks to buy right now. 

Block (SQ) Stock Analysis: Quarterly Earnings

Let’s jump into Square’s Q3 2021 earnings report:

  • Gross Profit: $1.13 billion, up 43% YoY
  • Seller ecosystem generated gross profit of $606 million, up 48% YoY
  • Cash App generated gross profit of $512 million, up 33% YoY
  • Acquired Afterpay, a BNPL company with +16 million consumers and 100,000 merchants 

Block provided updates on its exciting expansions in regions such as the UK, Australia, and Canada. 

The company also added new features to the Cash App, offering new services to individuals between 13 and 17 years of age. 

This is more evidence of the Cash App ecosystem growing and adding layers with each passing quarter. 

Block Stock: The Bear Case

Block defies any historical or current valuation metric. This is not a stock for a value investor. 

Just because a company’s roadmap is promising doesn’t mean it’s a buy today. 

In addition, while Block benefits from its first-mover advantage amongst other fintech disruptors, there may be a reason nobody has challenged the bulge bracket banks.

What’s to stop JPM or Bank of America from acquiring fintech startups and rolling out digital wallets to their existing (90 million combined) customers?

There’s no shortage of competition in the financial industry — let’s examine Block’s top competitors next.

Who Is Block’s Competition?

While many of these companies do not necessarily compete head-to-head, a simple pivot could make them competitors tomorrow.

Let’s looks at Block’s top fintech competitors:

  • PayPal (PYPL)
  • Visa (V)
  • MasterCard (MA)
  • American Express (AXP)
  • Stripe
  • Fiserv (FISV)
  • Shopify (SHOP)
  • MercadoLibre (MELI)
  • Green Dot (GDOT)
  • Clover
  • SoFi (IPOE)
  • Apple (AAPL)
  • Robinhood (HOOD)
  • Coinbase (COIN)

It’s important to note that many of these companies actually work with another. For example, the “Cash Card” is powered by Visa and the PayPal Venmo Credit Card credit card is supported by Mastercard.

Block’s Bitcoin initiative is welcoming competitors from the crypto ecosystem too. Here are SQ’s top crypto competitors:

As you can see, the legacy payment networks like Visa and Mastercard embrace the fintech revolution and facilitate the next generation of payments.

If Block executes on its long-term goals — obtaining the ILC is a good start — it will compete with the world’s largest financial service companies, including Goldman Sachs, JPMorgan, and Morgan Stanley.

Does Block Stock Belong in Your Portfolio?

The right amount of SQ in your portfolio depends on a variety of personal factors, such as investing goals and risk tolerance.

Ask yourself the following questions to find the right allocation to SQ in your portfolio:

  • Does Block get me closer to or further from my investing goals?
  • Can I tolerate a 30% decline in SQ?
  • Will the Cash App surpass PayPal’s Venmo?
  • Can the Cash App and Venmo coexist?
  • Will Block grow into its valuation? And will this happen within my investing horizon? Does it have to?
  • Is the company’s Bitcoin initiative aligned with my investing goals?
  • Is QQQ a better option for technology exposure?
  • Will neobanks eat away at traditional bank’s market share?
  • Why buy SQ when you can buy bitcoin?
  • Does Block have an effective moat to fend off its competitors?

Block Stock FAQs:

Is Block stock a buy right now?

Block (SQ) is leading the fintech boom — which is still in its infancy.  In our estimation, Block is best positioned to benefit from the rise of digital wallets, which represents a multi-trillion-dollar market that’s just beginning to ramp up.

Is Block stock overvalued?

Block stock has fallen precipitously from its all-time highs of $277 per share in early 2021. However, it’s still a pricey stock by most traditional valuation metrics. Block stock is not recommended for value investors. 

Why is SQ stock dropping?

SQ stock is dropping over fears of a taper from the Federal Reserve. The raising of interest rates, or even the discussion of raising rates, can cause cause sell-offs in high-growth stocks like Block (SQ). 

Does Square pay dividends?

Block (SQ) does not currently pay a dividend. It is atypical for tech companies to pay dividends because they’d rather reinvest profits into growth opportunities. Instead of attracting investors by paying a dividend, Block is trying to grow into its valuation by expanding its customer base.

Bottom Line: Is Square Stock a Buy?

Block is the holy grail of fintech — the lagging indicator in value of mobile payments is much larger than anyone anticipated.

More Investing Resources:

This article is for informational purposes only. It is not intended to be investment advice.

Sean Graytok
Sean Graytok

Sean Graytok is our Co-Founder and is a recognized expert in investing, cryptocurrency, and financial management. His work has been cited in leading industry publications, such as InvestorsPlace and Business Insider. Sean is interested in the people and companies who are driving financial innovation.