Block stock has absolutely crushed the market since it came public in 2015.
However investors have been put on a wild roller coaster ride this former
high flyer is currently down more than 50% from its 52-week high so what does block do
and does this company deserve a spot in your portfolio today here's everything
you need to know about this business my name is Brian Feroldi and my name is Brian Stoffel
thanks to stockcard.io for sponsoring today's video as of the time in this recording i am a
shareholder of block and i am not so brian let's take a look at block this is a big organization
valued at $71 billion even after falling 50% and it trades under the ticker sqSQwhich
is a reference to its former name of square. Block's mission statement is to enable economic
empowerment this is simple inspirational and optional this company really understands mission
statements i agree brian but let's see how they actually do this there are two key reportable
segments the first is square that is focused on economic empowerment for businesses the second
part of this is cash app an in-house developed app that's focused on helping individuals achieve
economic empowerment the square business is one that you have undoubtedly come into contact with
if you're a customer of a small or medium-sized merchant beyond just accepting payments at the
company's point of sale terminals the company actually offers a huge number of services to
those businesses this includes helping with things like marketing and loyalty programs
employee tracking and reporting access to funds and financing deal payroll as well as numerous
integrations that make it easy to add ancillary services now the cash app side of the business is
focused on helping individuals manage all of their finances from one convenient app now usually users
are brought into the ecosystem because the easy peer-to-peer payment system again very similar to
paypal's venmo but it goes far beyond that you can use this app as a cash card you can participate in
boosts which is a rewards program offered by block and you can even get your funds direct deposited
into the app and use it to buy stocks or bitcoin speaking of bitcoin bitcoin makes this company's
financials relatively complex to understand when one of the cash app users actually buys bitcoin
in their account block has to record that as revenue on the top line for that reason the
company's revenue number is going to bounce around like crazy depending on the price of
bitcoin so what can we do about that well let's go back and revisit our income statement usually we
look at revenue as a sign of how well the company is doing at getting people to buy more products
but because bitcoin purchases have to be recorded as revenue it's no longer such a good indicator
instead management focuses on reporting gross profit which strips out the cost of revenue
including bitcoin we think that looking at gross profit is a more accurate way to judge how bloch's
business is performing if that wasn't complicated enough we also need to mention that block closed
on the acquisition of after pay a key buy now pay later player and that acquisition is not included
in the company's financials when they eventually report their q1 results it will also include the
results of afterpay and the afterpay acquisition was actually very sizable when compared to blocks
business coming in at $29 billion so when we look at how block actually makes its gross profit
currently about half of the total comes from subscription revenue and about 45% comes from
usage based revenue the remaining five percent of revenue is currently coming from margin based
on bitcoin sales now when we look at the company's customer acquisition costs they're actually pretty
good block only has to spend about 35% percent of its gross profit on sales and marketing and
what that tells us is that square and cash app are brand names that are resonating with their
customers when it comes to customer demand we largely see this business as recession resistant
however during the most recent downturn many of blocks customers had a sharp reduction in revenue
that impacted blocks revenues directly and because so much of this revenue is coming from either
subscriptions or usage transaction based products the majority of revenue is recurring turning to
the company's moat we do think that block benefits from the network effect specifically on the cash
app side the more people that use cash the easier it is for those users to send cash between each
other's users however we think that this is a low level of moat given the competition from companies
such as venmo we think that the more significant mode comes in terms of high switching costs
once merchants start using more and more tools that the square side of the business has to offer
they're loath to switch and the same can be said for individuals if they're using the cash
app to pay their bills to get direct deposits to invest to even do their taxes you'd need a really
good reason to switch to competitor and we can see this playing out on the black side of the business
over the years the number of merchants that are using four or more of those tools has grown
substantially that creates a sizable moat around the business we also think there's reason to give
this company points for its brand name the name square cash app and after pay are all well known
in their respective niches and are growing in popularity when you put all this together we
believe that black's moat is expanding however we also recognize that it is coming under pressure
from competition turning to financials the company's revenue growth has been extremely
high over the last three years coming in at 94 however keep in mind that this figure also include
bitcoin sales which are going to be very volatile moving forward when we look at the consolidated
gross margin for all of blocks businesses it comes in at about 25% which doesn't sound great
but again we have to back out the effect that those bitcoin purchases have on the gross margin
if we look at the core money makers for this company the subscription and the usage based
products the gross margin is a much healthier 55% one thing that i like about block is that it has
been focused on net income for many years that remains true today as the company is currently
generating positive net income from operations and i really love focusing on free cash flow and on
that respect block is also doing very well having brought in over $700 million dollars in free cash
flow last year block's balance sheet is in pretty good shape with nearly seven billion dollars in
cash and only about $4.6 billion dollars in debt that gives it a strong net cash position
and returns on capital are positive which is saying something because many of the companies
we review on this channel that's not the case but those returns on capital are still relatively low
turning to management block was founded by jack dorsey who still remains a ceo today if that name
sounds familiar to you that's because he founded another company you're probably familiar with
twitter and employees give block stellar reviews earning 4.2 stars out of 5 on glassdoor.com
and dorsey getting a 91 percent approval rating inside ownership at block is also
fairly high coming in at about 12% or about $8 billion dollars at current prices when we turn
to blocks optionality we see that there is a lot going on here obviously square and cash app are
the key drivers of the business but we've talked about the role that bitcoin will play we've talked
about the acquisition of after pay which will start showing up soon in the company's financials
and we need to mention the acquisition of title a music streaming company it's yet to be seen
whether or not that was a good purchase or a waste of money but we'll be interested to see how it
plays out as for operating leverage we think that block has a whole bunch ahead of it given that
its costs are very high right now this number will obviously bounce around as those acquisitions are
incorporated but longer term we do not yet think that this company is fully optimized for profits
when block estimates its total addressable market it's looking primarily at the square and cash app
sides of the business the inclusion of bitcoin and soon after pay will expand it but today it
believes it has about $145 billion market to go after of which it's captured less than five
percent now the company has been very acquisitive in recent years with purchases like after pay
and title but most of this company's growth still comes from organic sources however moving forward
we think that the chance of this company continue to making acquisitions is high and that is a risk
worth watching so how is square done against the market as an investment and the answer is
really good despite falling over 50% from its recent highs it is still smashing the market since
its ipo and over the last five years block also has a history of exceeding expectations having
done so in three out of the last four quarters and that one other one was when it just met
expectations perfectly and unsurprisingly black is not focused on returning cash to shareholders
at this point we hope one day in the future it will but we understand this approach for now
turning to risks there are a bunch for investors to keep in mind first off there's competition
companies like shopify paypal and affirm are all sizeable direct competitors that block's
going to be competing against there's also a whole host of smaller players such as shift 4
lightspeed toast shopkeep wicks and on and on and on the amount of capital that's gone into
the fintech space is very high so competition is definitely a risk for investors to watch
it's also important to note that shareholders have consistently been deluded over time
part of that is because the company sometimes uses stocks to make acquisitions but another
part is the fact that stock-based compensation is relatively high at block we also think that this
company's financial statements are hard to analyze and after the act to pay acquisition they're going
to become even harder it's also worth mentioning that outside forces definitely will play a role
in how this company does the primary one being the price of bitcoin and when we look at the company's
valuation we give it a medium high rating true it is trading for over a hundred times trailing
free cash flow at the same time we've talked about how gross profit is an important indicator
and it is currently trading for about 16 times gross profit keep in mind that those numbers
are going to change drastically after the after pay acquisition goes through so take all that
with a huge grain of salt so what should investors watch to tell if this thesis is on track first and
foremost keep an eye on gross profit this is the primary metric that investors are going to use to
tell whether or not this business is succeeding we want to see this figure consistently go up and to
the right second keep an eye on free cash flows there are a lot of acquisitions that have taken
place and there's a lot of moving pieces black has done a great job of churning out cash while that's
happened but we need to see that continue and see that also grow in time third keep an eye on
the company's non-core businesses which includes bitcoin title and after pay the company is sinking
a lot of capital into those investments and we want to see that they deliver for shareholders
over the long term so how did block score on our investing checklists the answer there is
pretty good for me block got a 77 which is well into my investable category and for me it got
a score of 11 which is knocking on the door of being considered an anti-fragile business
all right brian we just we just made our calls so let's head on over to stockcard.io to hold
ourselves accountable i'm going to start in the anti-fragile portfolio i'm going to place a new
order the ticker symbol here is sq i'm going to do a buy decision we're recording this on monday
april 11th this is a 120 dollar stock so we're going to buy eight shares the score on your
framework was 11. then I'm gonna head on over to my quality checklist and i'm going to do the
exact same thing and while brian's doing that we want to remind people that you can go on over to
stockcard.io and view both of our portfolios for free but you can also enter the beat the
brian's contest where you pick five stocks that you think will perform the best starting today
and going until the end of 2022 there are prizes for those that beat us on a quarterly basis and
our overall winner will win a thousand dollars overall we think that block is a high-quality
business that has a bright future ahead but there are certainly plenty of risks to keep in mind did
you like this video give it the thumbs up and let us know in the comment section below brian's out