About Block Incorporated
So, a few things.
First and foremost, my Saturday morning routine is something I actually really look forward to, as I get to be my own boss, keep 100% of my tips and gleefully grin and every so often sway to my favorite tunes in my car all in the process of picking up and delivering someone’s morning migas.
Ok, it seems like I am being a bit facetious, however, while it is almost laughable to think of someone as being their own boss and business owner in the context of operating as an independent contractor for a food delivery and/or rideshare company, receiving little to no benefits, nor stock options, nor an inherent equity ownership in the company and is usually punished through the lowering of their acceptance rate if they opt to not take terrible, terrible, did I mention terrible, no tip orders, it would be completely unfair if I didn’t acknowledge the fact that DoorDashing and delivering for Uber Eats as well has helped me tuck away a lot of money for graduate school, and for that I am vastly appreciative, but that’s a whole different story.
Back to the Saturday morning routine.
Wake up at like 7:00 AM, rub some of the crust out of my eyes, mosey on over to my cell phonular (that is most certainly not a word, but just go with it) device, before responding to any texts or looking at anything on the World Wide Web, turn on the previously mentioned delivery driver apps and wait for the orders to pile in.
Or not.
In most cases, I’ll receive an order or two from a local Mexican restaurant (which shall remain unnamed, as I don’t have their consent to name-drop, even though their food looks pretty good and the portions are healthy, to say the least) and more times than not, drive about a quarter of a mile to pick up the food and every single time I show up, I notice their sleek looking, lean, clean, order and money capturing machine, their Square device.
Oddly enough, this stock analysis article is not (yet) sponsored by Block Incorporated or Square.
At least, this just so happens to be one of the few other products Block Incorporated sells through its payment processing platform arm, Square (not to mention the fact that Block Inc. also owns famed peer-to-peer money transfer platform, Cash App, essentially directly competing with Venmo), as the machine registers and processes customer payments, allowing them to easily tip the staff (we will save our thoughts on tipping for another article, alright?) and also allows the restaurant to gather a great deal of data to help them track what is actually selling, what maybe isn’t selling as well and how they can ultimately better operate their small business, as, after all, this is primarily the target customer demographic for Block Inc., which, objectively speaking, is both good and bad.
It is good in the sense that small businesses are the absolute, unequivocal backbone of the American economy and are vital in offering value for the communities they serve through their products and/or services, not to mention the revenue they generate for their local government entities, and, who are we kidding, the world needs less desk monkeys and more people looking to branch out and carve out some generational wealth for themselves and their family members.
Evidently, Block Inc. is a company that helps these smaller businesses a lot, especially in the sense that they have largely democratized and disrupted the payment capturing and processing industry as a whole through their various innovations.
Nevertheless, in the context of how one of the companies most prized subsidiaries, Square, generates a bulk of its revenues, it depends largely on small businesses and this frankly isn’t glowingly attractive to us, as many small businesses are far from being immune to recessionary and/or inflationary pressures or practically any form of economic downturn(s) for that matter.
A great example of this is what COVID-19 did to small businesses in and around the United States, and yes, we concede that COVID was (and still is) an extraordinary circumstance, however, let’s just say large companies such as Walmart or McDonald’s aren’t going out of business anytime soon, irrespective of the prevailing or future economic backdrop(s), nor are their revenues dependent upon taking relatively small pieces of transactions, but in actually selling a variety of tried and true products.
Surely one doesn’t need to suffer for the other to benefit, and many small businesses actually thrive during periods of economic distress, however, it is still quite challenging to keep the lights on and if you can’t keep the lights on, chances are you will naturally have to part ways with your payment processor and hardware distributor, Square.
Subsequently, if small businesses close at a rapid rate or simply don’t sell as much of their products and/or services, this will certainly lead to a softening in Square’s revenues, and we surely aren’t the largest fans of this type of transaction-reliant, at times unstable revenue generation model, as it lends itself more than exposed to the greater overall status of the economy, which really doesn’t allow us to sleep all that well at night.
At least, this is how we view things prior to looking at any of the company’s financials, so we very well might be totally off the mark, and in this case, we would be happy to be way off.
At any rate, it should be noted that Block Inc. generates a more than considerable amount of its total annual revenues through transaction fees, taking a percentage from each transaction a business does (more on the company’s pricing here), while, of course, also generating revenue through the sale of its point of sale (POS) hardware and other accessories.
“With that in the eggshell,” as one of Block Inc.’s famed board members, Shawn Carter, better known as prolific rap figure by the stage name of Jay-Z once said, let’s dig into the company’s core financials and other relevant ratios and metrics so as to determine whether or not this technology company’s stock (NYSE: SQ) is worth seriously considering investing in for now and the years that follow.
Block’s stock financials
With a market capitalization of $36.63 billion along with a prevailing share price of $59.65, not to mention a nonexistent price-to-earnings (P/E) ratio and not an annually distributed dividend in sight, could anyone really blame Block Incorporated for not dishing out a dividend at this juncture, as the company is likely burning through a lot of cash right now, heavily investing and reinvesting in its current and prospective product lines while simultaneously not likely generating enough revenue to cover their costs, however, let’s check on this for ourselves instead of making such bold assumptions and continue analyzing Block, as we have encountered many successful technology companies that don’t pay out a dividend nor do they have a readily available price-to-earnings ratio on display, as this is seemingly now just a norm within growing segments of the technology sector, right or wrong and for better or for worse.
With respect to current condition of the company’s balance sheet, Block’s executives are in charge of responsibly deploying and taking care of around $31.3 billion in terms of total assets along with approximately $14.1 billion in terms of total liabilities, which, for all of the costs and transactions this company is responsible for and all of the back-end support needed to run such an already well scaled operation, is a very impressive total asset-total liability breakdown, as the company can seemingly afford to continue funding current and future growth initiatives given its total asset coverage, and with that, is also apparently ready to ponder and pursue acquisitions of smaller, more nimble, perhaps artificial intelligence (AI) payment-related platforms that could drastically enhance Block, Square, Cash App and the rest of the gamut.
Moving right along to the state of the company’s income statement, Block Incorporated has been doing exactly what it should be doing; growing revenues on a year-over-year (YOY) basis at a rapid rate, not to mention pleasantly surprising us throughout 2019 and 2021, especially given our previously outlined fears regarding this company’s economic sensitivities.
For example, the company’s total annual revenues in 2018 stood at almost $3.3 billion, rising the next year to $4.7 billion, nearly $9.5 billion in 2020 (this marked jump likely due to more transacting online and thus using Square to handle such transactions), $17.6 billion in 2021, leading all the way to its latest reported figure of $17.5 billion, as reported in late 2022.
Between 2018 and 2021, the year-over-year revenue growth was quite literally nothing short of impeccable, however, 2021 and 2022 perhaps speak a bit to the consumer spending cyclical nature of Block’s overall business model, as we think consumers have tightened their spending, for example, in the sphere of eating out or going out and paying for haircuts and thus transacting less with local venues, inevitably leading to Block Inc. generating less revenue, with its total annual revenue flattening between and during 2021 and 2022.
While we are certainly happy to find that the company’s revenues didn’t by any means plummet, this relative softening still nevertheless speaks to the not exactly recession proof nature of this company and its stock (NYSE: SQ).
With respect to how much cash this company is burning in obtaining the aforementioned annual revenue figures, Block’s reported net income has fluctuated a great deal (also referencing since 2018), with its figures on this front ranging from as low as -$553 million (2022) to a relative high of $375 million (2019), which we think generally speaks to the, once again, cyclical nature of its business and perhaps the company’s management opted to simply reinvest heavier in certain years than others, which, from our standpoint, even with a relative loss of just over half of a billion dollars, isn’t all too frightening since, according to the figures displayed on its balance sheet and its recent revenues, can afford to eat some losses, although we certainly don’t condone that any company search for losses to be realized, but more so view these losses as continued commitments to sharpening, improving and expanding its business(es) around the world.
On that note, the company’s total cash from operations during the exact same time frame were actually positive on a year-over-year basis, ranging from $176 million (2022) and $848 million (2021), which is surely a positive in that it indicates that Block is able to generate a bit of cash, albeit not a whole lot.
Block’s stock fundamentals
Onto some of the more pressing figures as they pertain to profitability and returns on both assets and investments, according to the information displayed on TD Ameritrade’s platform, Block’s trailing twelve month (TTM) net profit margin is a not so intriguing -1.43% to the industry’s respective average of 28.43%, implying that Block has a long road ahead in terms of attaining a comparable TTM net profit margin with respect to the industry’s listed average, however, while we do think TTM net profitability is certainly something prospective and current shareholders should closely monitor with a company such as Block, this company is still investing rather aggressively, thus largely muting its prevailing TTM net profit margin, which is good in the sense that the specialized software and hardware platform is further differentiating itself from the competition and developing a stronger moat as a result, however, bad in the sense that we just hope it doesn’t string investors along far too long down a dark tunnel and until there is some surefire light at the end of the profitability tunnel, we are a bit skeptical, especially given the relative of its business model(s), even though given the aforementioned figures that it really hasn’t been as bad as we had initially anticipated.
Not saying it won’t happen that Block will become TTM net profitable sooner rather than later, but we haven’t enough that strongly, indisputably indicates this and thus it wouldn’t be fair nor reasonable for us to just give one false hope.
Prepare for the worst, pray for the best.
Also according to TD Ameritrade’s platform, Block’s TTM returns on both assets and investments are yet again fairly lackluster, with, for example, the company’s TTM return on assets standing well below at -0.96% to the industry’s respective average of 12.43%, which, again, we largely deem to be a byproduct of being a younger company being in full-on investment mode, that will hopefully grow its core TTM returns base(s) in the years to come as it continues scaling its operations and offerings.
Obviously, hope is far from a strategy, however, it is somewhat challenging to reasonably predict exactly where the company’s TTM return metrics will be in the next handful of years, again, due to many external factors, including the harped upon fact that the company is somewhat cyclical in nature, to certain degrees.
Should you buy Block stock?
Clearly, in any sort of business there are a multitude of unknowns, however, we feel as though, at least this juncture, there are a slightly higher amount of unknowns surrounding Block and its subsidiaries, at least from the perspective of some of the more important fronts, one certainly being sustainable, long-term TTM net profitability.
Sure, Block (again, through its subsidiaries) will continue generating revenue, as we view this company as one that will be around for the long haul, however, we surely don’t enjoy the semi-cyclical nature of its revenues (specifically referencing its recent flattening as reported between 2021 and 2022), and while, of course, we love small businesses and entrepreneurs, when it rains, it pours and whether it be a recession, another pandemic or some other catalyst of financial upheaval and some might say inevitable turmoil, said entities are going to struggle much harder than larger, more established companies and corporations, typically meaning less sales, naturally leading to less revenue being generated by their favorite payment hardware and software vendor, Block Incorporated.
While the company’s balance sheet is in pristine shape, its revenues have been ramping up for the most part (again, it is worth noting the softening in the last couple of years) and its total cash from operations have technically been positive each year since 2018, we still see far too many points of uncertainty and some definitive negatives as well, for instance, with its lackluster prevailing TTM net profit margin.
Therefore, we feel it would be the utmost objective course of action to give the company’s stock (NYSE: SQ) a “sell” rating, especially as we enter a potential era of consumer budget tightening.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.