Block: Fintech Powerhouse Has Obliterated Q3 Earnings (NYSE:SQ)



To block (NYSE:SQ) formerly known as Square, is a fintech powerhouse with an ecosystem of financial products. Founded by the legendary Jack Dorsey (who also founded Twitter), Block has been rapidly growing its popular Cash app. In the third quarter of 2022, the the company beat growth estimates above and below the line. This was despite macroeconomic headwinds and a decline in Bitcoin earnings. The stock price is down ~77% from its all-time high which is why in this post I’m going to detail Q3 earnings before revealing the valuation let’s dive in.

Data by YCharts

Strong third quarter

Block generated strong financial results for the third quarter of 2022. Revenue was $4.52 billion, an 18% year-over-year increase, exceeding analyst expectations by $47 million. As mentioned in previous posts on Block, Bitcoin trading makes up ~40% of total revenue, so the drop in price and popularity has affected the results. Excluding Bitcoin, total net sales were $2.75 billion, a rapid 36% year-over-year increase. It is therefore clear to see that Block’s core business is growing strongly. It should also be noted that Bitcoin trading has never been a major profit engine for the company and has been the low-margin part of the company. The company grossed $1.57 billion in the third quarter of 2022, growing a rapid 38% year over year. Block has two main ecosystems, the “Cash App” and “Square”, these are connected by the Buy Now Pay Later [BNPL] provider Afterpay that was acquired at the end of 2021. I will now dive into each of the “ecosystems” and the main financial drivers in turn.

Gross profit

Gross profit (Q3 earnings report)

Cash app ecosystem

The Cash App is a mobile application that enables consumers to make simple peer-to-peer payments using the iconic “cash tag” derived from the “hashtag” widely used in the social media world. However, the application has expanded to include Bitcoin trading, stock trading and more. As Block states, the app is the “easy way to send, spend, bank and invest”. In the third quarter of 2022, the application generated revenue of $2.68 billion, an increase of 12% year-over-year. Excluding Bitcoin and the BNPL platform, Cash App revenue was $817 million, a rapid 41% year-over-year increase.

The Cash app saw a huge boost in popularity in 2020 as there were a lot of incentive checks resulting in a cash consumer. Throughout 2022, consumer confidence was very different, as was the financial position of most people. Despite these challenges, Block has managed to increase Cash App’s gross profit to $774 million, a 51% year-over-year increase.

cash app

cash app (Q3 earnings report)

Cash App’s gross profit is driven by three leading indicators namely Actives, Inflows Per Active and Monetization Rate on Inflows. The company invested significantly in building the Community, Financial Services, and Commerce components of the app in the last quarter, which was successful. Cash App’s organic peer-to-peer network allows the application to spread virally. Block ran a series of targeted marketing campaigns to reach “high-value” audiences. The campaigns were successful as the company increased its active users with transactions to 49 million, a 20% year-over-year increase.

The company has gradually expanded its product to include banking and aims to merge it offline with the online through a Cash App Card. This is a brilliant system because from my research on mobile application retention, I found that users are more likely to stick with an application and feel more connected to a brand if they have a physical card. In addition, a Tokenized debit card in an Apple pay wallet also helps to keep the brand top of mind with the consumer. The Cash App Card has proven to be immensely popular, with an attachment rate reaching 36% of monthly active users. Block has also introduced direct deposits, checks and even paper money. The ability to add “paper money” to a mobile application is genius. Here’s how they make it happen: Block partners with major merchants like Walmart, 7Eleven, and more. A user simply enters the store and has the merchant scan a barcode to deposit. Since its launch last year, Cash App has had more than $3.5 billion in paper money deposits.

cash app

cash app (Q3 earnings report)

Square ecosystem

The second “ecosystem” is Block’s iconic trading solutions, which consist of outlets [POS] devices and software. The Square Ecosystem generated $1.77 billion in revenue in Q3.22, up 27% year over year. While the company also generated $783 million in gross profit, up 29% year over year. The Buy Now Pay Later platform generated ~$105 million in revenue and $75 million in gross profit.

Square gross profit

Square gross profit (Q3 earnings report)

The company reported a lower percentage of debit card transactions that were close to pre-pandemic levels. The total gross payment volume [GPV] up 20% year over year, with strong growth in international markets up 40% year over year. This is part of Square’s strategy to expand internationally. In the third quarter, the company launched Instant Transfers in Australia and Square Loans in the UK, as well as its Buy Now Pay Later expansion to Canada and the UK. In Japan, QR code payments are extremely popular, with the most dominant provider being a company called PayPay, which has 51 million customers and controls two-thirds of Japan’s QR code GPV. Therefore, instead of competing directly with PayPay Block, merchants have the option to accept PayPay QR code payments through their POS systems. Square has also gradually gone “upmarket” targeting larger traders with over $500,000 in GPV on an annual basis. The percentage of mid-market sellers has increased from 31% in 2020 to 40% in 2022.

Gross payment volume

Gross payment volume (Q3 earnings report)

The Square ecosystem is wonderful because the company records all the trades of its merchant’s experience. Square can then use this data to identify spending patterns and underwrite loans through its Square Loans service. In the third quarter of 2022, the company issued 126,000 loans worth $1.14 billion, a rapid 92% year-over-year increase.

Square’s developer platform is also a major selling point of the system. This enables merchants to create custom solutions and scale their business across multiple locations faster than with existing solutions.

Total Cost and Profitability

Back to the general financials, Block reported $1.62 billion in operating expenses in the third quarter of 2022, up a whopping 46% year over year. This was driven by product development spending, which increased year over year to $548 million, up 52%. Overall, these costs aren’t a big deal as the company has expanded its workforce to include more of those people in data science and engineering. Sales and marketing expenses increased 19% year over year to $485 million. While general and general expenses were up 48% year-over-year to $395 million. G&A growth was again driven by the workforce related to finance, legal and HR to support the Afterpay platform. Block generated adjusted EBITDA of $327 million, which was up a rapid 40% year over year, which was positive.

Adjusted EBITDA

Adjusted EBITDA (Block)

Profit per share [Normalized] was $0.42 which exceeded analyst expectations by $0.19. Without any adjustment, the company reported negative earnings per share of -$0.02, which still beat analysts’ expectations by USD 0.24, as analysts expected a large loss of USD 0.26.

Solid balance

Block has a solid balance sheet with $6.5 billion in cash, cash equivalents, blocked cash and short-term investments. The company has $4.5 billion in long-term debt, but only $460 million of this is short-term debt (to be paid within the next two years), and is therefore manageable.

Advanced Rating

To value Block, I connected the latest financial data to my advanced valuation model that uses the discounted cash flow valuation method. I have forecast revenue growth of 15% for next year, which is slightly slower than the previous 18% given the macroeconomic environment. However, as I progressed into Years 2 to 5, I predicted a slightly higher (but still conservative) growth rate of 16%.

Block stock valuation 1

Block stock valuation 1 (created by author Ben at Motivation 2 Invest)

To increase the accuracy of the valuation, I capitalized the company’s R&D costs, increasing the operating margin to 2.48%. In addition, I predict that this operating margin will increase to 15% over the next 7 years as the company’s investments begin to pay off and operating leverage begins to grow.

Block stock valuation 2

Block stock valuation 2 (Created by author Ben at Motivation 2 Invest)

Given these factors, I get a fair value of $105 per share, the stock trades at $60 per share at the time of writing and is therefore ~44% undervalued.

As an additional data point, Block is trading at a price-to-sell ratio = 1.89, which is 75% cheaper than the 5-year average.

Data by YCharts


Recession/Lower Payment Volume

High inflation and rising interest rates have led many analysts to predict a recession. Inflation increases input costs for both consumers and businesses, usually resulting in a slowdown in consumer spending and thus a lower payment volume for Block. The good news is that recessions are cyclical by nature as the economy recovers, and so do consumers.

In the longer term, the company is focused on “balancing growth and profitability” as it seeks to moderate cost growth. According to management, the Cash app should be a key area where operational leverage will be seen in 2023.

Final Thoughts

Block is a fintech powerhouse that has emerged from the pandemic as a much stronger company. The two growth engines (Cash App and Square) are performing well and the Buy Now Pay Later application is starting to gain momentum. The stock is intrinsically undervalued and could therefore be a great long-term investment with strong future growth prospects.

The Valley Voice
The Valley Voice
Christopher Brito is a social media producer and trending writer for The Valley Voice, with a focus on sports and stories related to race and culture.


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