Should you buy Block stock?

Block stock analysis. SQ stock.
I've started a newsletter to find overlooked, actionable stock ideas:
https://www.overlookedalpha.com

Block (formerly known as Square) has caught the attention of investors for a number of reasons.

Number one, it’s seen incredible revenue growth as it attempts to disrupt the lucrative payments industry. Number two, its CEO is Jack Dorsey, the co-founder of Twitter. And number three the stock has been exceptionally volatile. It’s crashed 80% since its all-time high but its still up more than 350% since its IPO back in 2015.

That share price gives Block a market cap of 36 billion dollars. With 6.5 billion of cash and investments and 4.1 billion of long-term debt, the enterprise value is roughly 34 billion.

Revenue at Block had been growing at a rapid rate of over 50% a year but last year saw an unexpected drop of 1% coming in at 18.6 billion for the last 12 months.

And the company is not yet profitable. EBITDA was negative 40 million and net income was minus 365 million. A lot of that is due to heavy stock-based compensation which comes in at 1.1 billion.

Revenue at Block is split out into 4 buckets:

● Bitcoin revenue, linked to Block’s Cash App totaled $7.5b and makes up 40% of the total
● Transaction-based revenue was $5.9b, 32% of the total
● Subscription and services made $5b (27% of the total)
● And hardware was $0.2b (1% of the total)

Although revenue is impressive it’s important to consider profitability.

Subscriptions is the most profitable segment with 80% gross margins and transaction-based revenues has a 37% gross margin.

But bitcoin revenue, despite being the largest revenue driver has a gross margin of 0.02%, meaning it barely contributes any profits, and the final segment hardware, has a negative gross margin.

But let’s assume that Block can return to growth and lets assume its transaction and subscription revenues can compound at 10% a year for the next 10 years.

If it can operate at a similar net margin as PayPal of 15% that would see the company produce 4.2 billion of net income in 10 years time. A 25 times multiple on that figure gets us to a market cap of 105 billion which works out to an investment return of 11.3%.

#stocks #investing #stockstowatch #blockstock