Is Block Stock a buy?

The S&P 500 recently rose to new all-time highs following the Federal Reserve’s first interest rate cut in two years. While the broader market index continues to rise, that doesn’t mean there aren’t deals for patient investors today.

Block (SQ -1.72%) it’s a stock that’s still 76% below its all-time high of over three years ago. The company has taken a page from the playbooks of larger tech companies and is looking to cut costs and become more efficient to improve margins and the bottom line. It’s making solid progress on its initiatives, but is it enough to make the stock a buy today?

Block’s rapid growth came at a high cost

Block offers a suite of financial products that appeal to businesses and individuals. The company’s original product, Square’s point-of-sale system, enables businesses to process payments and manage sales and inventory. First launched in 2009, this new technology enables small businesses to accept payments quickly and easily using a smartphone or tablet and has helped usher in a new era of digital payments.

The company also offers the Cash app, which is one of the most popular investing apps among all generations, according to The Motley Fool’s Generational Investing Tools survey. Through the Cash app, customers can access banking services, invest in stocks and Bitcoinand manage payments through Afterpay, Block’s buy now, pay later service.

Block’s growth over the years is undeniable. Since 2017, Block’s total revenue has gone from $2.2 million to nearly $22 million last year, good for a 46.5% compound annual growth rate. This strong growth is driven by increased sales from transaction-based revenue, subscription and service revenue from the Cash app, and Bitcoin-related revenue from its customers’ purchase of Bitcoin through the Cash app.

Despite the strong growth, Block’s spending grew faster. The company’s net income declined every year from 2019, when it earned $375 million, to 2022, when it posted a net loss of $541 million.

SQ Revenue (TTM) data by YCharts.

Just last year, the fintech began to curb its spending, and CEO Jack Dorsey laid out a longer-term plan to bring Block back. Dorsey’s goal is the “rule of 40,” in which Block will aim for gross profit growth plus adjusted operating margin to add up to 40% by 2026. The main goal of this goal is to get the company to improve its margins and to get a raise. as efficiently as possible.

What’s next for Block?

Last year, Block announced plans to limit its headcount to 12,000 to cut costs. Dorsey said, “We expect to maintain this cap until we believe business growth has significantly outpaced company growth.”

So far, the company’s efforts to cut costs are paying off. In the first six months of this year, Block’s net income is $667 million, well above last year’s net loss of $3.7 million.

To achieve more efficient growth, Block aims to better integrate all of its product offerings into one. In particular, Dorsey told investors that Block’s ability to integrate Square and the Cash App “allows us to offer consumers experiences that others can’t, especially for commerce.”

In a memo to employees in July, Dorsey told employees that Block would eliminate its business silos and dismantle its business unit reporting structure. Dorsey wants to bring Block back “to the way we started as a company,” and will address Block’s “three issues” of “collaboration, craft, and flexibility.”

Image source: Getty Images.

Is Block now a buy?

While the restructuring fits with Dorsey’s previous comments, Macquarie analysts, as reported by The Fly, are concerned that Block is making “slower progress on initiatives.” For those who own Block stock, that could mean a near-term rebound may not be in the cards.

However, I am optimistic that restructuring is the best long-term move. The company’s Cash app is well-positioned, especially among younger investors, and better integration with Square and Afterpay could give the payments network a big boost.

Block has yet to execute on his plans, but has made solid progress this year as his bottom line continues to improve. Today, the stock is valued at a price-to-earnings (P/E) ratio of 15.2 based on one-year forward earnings, which could provide an attractive entry point for long-term investors.

If you’re not convinced, you’ll want to monitor its earnings results over the next few quarters and wait for confirmation that the company is making further progress toward its goals.