Block: A 'Buy' On Valuation And Bitcoin Strategy

Summary Block, Inc. has diversified business segments with strong revenue from Square and Cash App, despite slowing user growth from the latter. The stock is undervalued, trading at 12x trailing earnings, making it attractive compared to the overvalued broader market. Block's sensible Bitcoin strategy allows for potential gains without being over-exposed. Bitcoin transactions make up a small portion of the company's total gross profit. Despite risks like a potential recession, Block's 2024 performance, realistic valuations and platform integration efforts make it a 'buy'. Block, Inc ( XYZ ) is a company that I've been quietly following for a while. During the COVID-era tech run in stocks, XYZ was one of the highest fliers due. The stock's inclusion in Cathie Wood's ARK Innovation ETF ( ARKK ) at a time when Wood's flagship fund grew to roughly $28 billion in AUM: Data by YCharts More recently, we've seen the price of Block, Inc come back down to earth following a retracement that has the stock more than 80% off it's all time high of $289 per share from August 2021. Interestingly enough, it seems as though some of the COVID-era high fliers have lived and died by Ark Invest flows. And as fate would have it, ARKK has been a net seller of XYZ for essentially 15 months straight: ARKK Holdings of XYZ (CathiesArk) ARKK holdings of XYZ are currently down to 2.3 million shares from just under 8 million in December 2023. The combined XYZ holdings through all of Cathie Wood's Ark Invest funds are 3.8 million shares, and the stock gets a weighting rank of 12. For a brief period in March 2024, that weighting rank was as high as 2. This begs the question, with Ark Invest seemingly losing interest in the stock, is it actually time to take a look at Block, Inc? I think yes. Block, Inc Business Segments For followers of the stock, this will hopefully serve as a brief review. However, the stock is not one that I have covered before for Seeking Alpha. So for my own readers who may not be familiar with Block, Inc, the company primarily provides payment processing services and operates platforms for both B2C and P2P interactions. The B2C solution is Square and helps businesses accept credit card payments. Square's customer base is fairly diverse with 33% coming from the food beverage industry, 17% from retail, and a relatively even split among Professional Services, Personal Care, Health/Fitness, and Home & Repair. As of Dec 31, 2024 (The Block) Even within the categories themselves, Square's customer base is diverse as well, with no more than 5% of Gross Payment Volume - or GPV - coming from any one customer. That has been the case for 3 years running. The P2P product is Cash App. Cash App is the top finance app on Google Play and the second most downloaded app on iOS in the United States. Annual inflows through Cash App hit a new high in 2024 at $283 billion and have been growing at a 25% CAGR since 2020. However, it should be noted that monthly active user growth has been slowing down for several years: Cash App MAU Growth (Cash App, Author's Chart) At 57 million monthly active users in 2024, annual MAU growth over 2023 was just 1.8% and is admittedly slowing down considerably. 2024 MAU growth was down from 9.8% in 2023 and 15.9% in 2022. But again, inflow growth remains robust. Beyond the payment processing platforms Square and Cash App, Block also owns the music streaming service TIDAL and Bitcoin ( BTC-USD ) projects Bitkey and Proto, which aim to compete in the Bitcoin wallet and Bitcoin mining spaces. Just Another Bitcoin-Adjacent Company? Block, Inc founder and CEO Jack Dorsey has been a notable advocate for Bitcoin and that is reflected through both his own personal usage of the decentralized social network Nostr - which utilizes Bitcoin's Lightning Network for micropayments - as well as Block, Inc's corporate approach to Bitcoin. In addition to developing Bitkey and Proto, Cash App users can buy Bitcoin in increments as small as $1 and store the digital asset directly in the app through a custodial account. Cash App has also enabled Bitcoin deposits and withdrawals, as well as integration with Lightning Network. The company also owns 8,485 Bitcoin. Those coins have a market value of $710 million. Block, Inc BTC Holdings (BitcoinTreasuries) Unlike many of the other companies that have BTC stashes this significant, Bitcoin is not Block's sole focus and the BTC/Market Cap ratio for the company is just 2.1%. While this figure is inline with a company like Coinbase ( COIN ), XYZ really shouldn't be viewed as a pure Bitcoin-proxy the way Strategy ( MSTR ) might be. The stock has been correlated with the Nasdaq-100 more so than Bitcoin. The table below shows the monthly return correlation with the ProShares Bitcoin ETF ( BITO ) and the Invesco QQQ Trust ETF ( QQQ ) over the last three years: 36 Month Return Correlation Ticker XYZ QQQ BITO Block, Inc XYZ 1 0.71 0.6 Invesco QQQ Trust QQQ 0.71 1 0.55 ProShares Bitcoin ETF BITO 0.6 0.55 1 Source: Portfolio Visualizer, 11/1/21-3/31/25 While BITO's correlation with the Q's is also evident at 55%, XYZ is closer to the Q's at 71% than it is to BITO at 60%. The point is, Block is really more of a company that uses Bitcoin rather than one that should be viewed as dependent on Bitcoin. As I see it, Block has put itself in a position to benefit from Bitcoin's potential success without over-leveraging the idea. Revenue and Profitability Breaking out Block's revenue by source, the company appears to be highly reliant on Bitcoin transactions, as the company's biggest revenue segment for each of the last three years has been Bitcoin: Revenue (000s) 2024 2023 2022 Transaction-based $6,613,680 $6,315,301 $5,701,540 Subscription and Services $7,164,799 $5,944,842 $4,552,773 Hardware $143,369 $157,178 $164,418 Bitcoin $10,199,205 $9,498,302 $7,112,856 Total $24,121,053 $21,915,623 $17,531,587 Source: Block, Inc However, I think this is a bit misleading because Block's gross margin on Bitcoin was just 2.8% in 2024 - up from 2.2% in both 2023 and 2022. Still, the overwhelming majority of Block's gross profit comes from Subscription and Services: Gross Profit (000s) 2024 2023 2022 Transaction-based $2,732,667 $2,613,285 $2,337,512 Subscription and Services $6,028,986 $4,869,713 $3,691,028 Hardware -$93,072 -$110,472 -$122,577 Bitcoin $288,819 $205,189 $156,123 Total $8,889,036 $7,504,886 $5,991,892 Source: Block, Inc At $6 billion in 2024 gross profit, Subscription and Services accounted for 68% of Block's gross profit in 2024. From an operating income standpoint, 2024 was a terrific year for Block, Inc: Data by YCharts With over $1 billion in operating income, 2024 was Block's best year by far. The same was true for earnings per share, which came in at $4.70 last year. Despite terrific growth in both operating and net income, XYZ remains near 52-week lows in share price. Part of the problem was Block missing the market's EPS expectations in Q4 and forward guidance that was not well received . Valuation Despite slowing growth in Cash App MAUs and a disappointing end to 2024, I think XYZ is worth 'buy' at this valuation. For a broader stock market that has become overvalued based on metrics like Market Cap to GDP and Stocks to Bonds ratios, Block, Inc might actually be somewhat attractive at current levels: XYZ Valuation Grades (Seeking Alpha) Against an S&P 500 PE ratio of 26 times earnings, XYZ looks good. Especially if the company can beat expectations in 2025. XYZ is currently trading at just 12 times trailing earnings and 23 times forward earnings. More broadly, Seeking Alpha gives XYZ a 'C-' overall valuation grade, with mixed grades that vary between 'A+' and 'F.' At a price to forward cash flow of 10.5, my view is XYZ is closer to 'cheap' than 'expensive.' Risks One of the things that does concern me about Block is the company has added 'buy now pay later' loans through Cash App. Such services have grown in recent years and add credit risk from a consumer cohort that could be exhibiting signs of being 'tapped out' financially. The bigger concern, though, is perhaps the potential of a recession in 2025. The market seems very uncertain about what impact tariffs will have on the global economy, and there are certainly indications that the major indexes could still find new lows this year. XYZ will not be immune from a further decline in the broader equity market. Closing Thoughts Like I said in my Coinbase piece earlier this month, panic in the streets can present opportunity. And like COIN, I think a long term speculative position in XYZ looks a lot better after what has been a steep selloff. Specifically for Block, I believe the company has been de-risked a bit due to a variety of factors. First, the valuations are far more realistic than they were back when the company was benefitting from ARK Invest AUM growth. Second, Block is making an effort to better integrate across its platforms. Third, my view is the company is exhibiting a very sensible Bitcoin strategy where it can benefit from BTC adoption but not necessarily be at the mercy of it. As a treasury instrument, the company has been far more conservative in growing its BTC stack than some of the other companies with significant holdings in the asset. I'm initiating coverage with a 'buy' rating.