Stock Block: Watch the Insiders and Buy (NYSE:SQ)

A director of Block Inc. (NYSE: SQ) has made a substantial stock purchase over the past week and in this investment thesis, I’ll look at the company’s outlook and consider the timing.

Sequoia’s Botha buys $25 million stock value SQ

A trade by Roelof F. Botha on August 8 showed the South African venture capitalist buying Block Inc shares. worth 25 million dollars.

The latest acquisition by the Sequoia Capital leader follows a similar insider acquisition of $27.5 million in November 2023. Botha was named global leader of the VC heavyweight group in April 2022 and is a member of Block Inc.’s board of directors. from April 2011.

After more than 13 years on the board, it is interesting that Botha, who sits on the board of seven other companies, has chosen to step up its investment in this company.

Botha was CFO at PayPal before its initial public offering and is clearly comfortable with Block Inc’s tax path.

Q2 Earnings by Block Inc. exceeded estimates

Block Inc. released its second-quarter earnings on Aug. 1, beating earnings by a wide margin and raising EBITDA guidance.

The parent of Square and Cash app raised its 2024 adjusted EBITDA target to $2.90 billion, compared to Visible Alpha’s estimate of $2.81 billion. It was also much higher than management’s previous guidance of $2.76 billion. Adjusted EBITDA margin is also expected to be higher at 33% versus previous guidance of 31%.

Gross payment volume of $61.9 billion was up from $54.4 billion in Q1 and $59.0 billion from the year-ago period. One negative from the earnings release was a revenue miss of $6.16 billion, missing the consensus of $6.30 billion. However, the figure was higher than the $5.96 billion posted in the previous quarter and $5.53 billion a year ago. Excluding the company’s bitcoin returns, revenue was up 13% year over year.

Square’s gross payment volume is on an upward trend Q-on-Q.

However, CashApp has seen a decline since Q1 2023 and has returned to GPV since Q1 2022.

Low costs, increasing bitcoin efforts

Jack Dorsey’s firm is now focused on fueling the payments company’s profitable growth by cutting jobs, reducing real estate and cutting non-essential expenses.

Block said last year it wanted to cut its workforce from 13,000 to 12,000 and announced in January this year that about 1,000 employees would be affected. With a large number of layoffs underway in the tech industry, management probably saw it as an opportune time to cut costs, in my opinion.

Looking at the quarterly financial statements for the past year, the company’s cost of revenue and operating expenses have not changed much, but operating income has seen impressive growth. A loss of $132 million a year ago is now a gain of $306 million. Any cost-cutting measures have the potential to reduce the company’s profitability.

Plant, property and equipment was $610 million a year ago and is now $528 million, but may be reduced further.

As for bitcoin, the company’s shareholder letter noted that as of June 30, 2024, Block held approximately 8,211 bitcoins with a fair value of $515 million. The statement also said another 173 bitcoins were purchased in the second quarter.

A key takeaway from the second quarter was the company’s agreement to supply its chips to bitcoin miner Core Scientific (CORZ). Block attempts to decentralize bitcoin mining and marks a step further than simply owning BTC.

“I am fully confident and have no doubt that this will be a significant business for us and that we will take the majority of the market share,” said Jack Dorsey.

JP Morgan estimated the Core deal could bring in $225 million to $300 million for Block, but said it would take time to assess the long-term potential.

“We have more to learn about the margins of this business, so we’re hesitant to underwrite this until we know more about the cadence and economics,” the analysts said.

In my opinion, margins are irrelevant in the short term when a company is trying to revolutionize the world of bitcoin mining.

Another key takeaway from Q2 earnings was a significant capital raise.

“During the second quarter of 2024, we issued $2.0 billion in senior unsecured notes due 2032. Including the net proceeds from this debt offering, we ended the second quarter of 2024 with $10.3 billion dollars in available cash,” management said.

In my opinion, Block Inc. may be planning additional bitcoin purchases in addition to its previous commitment, or may have plans to ramp up its bitcoin mining/chip operations or commit to an acquisition.

Valuation Outlook and Downside Risk

Block Inc. already trading at sales figures that are lower than the sector average.

The price to sales on a forward basis is just 1.55x, according to Seeking Alpha data, which is lower than the sector average of 2.69x. Enterprise value/sales is similar at 1.50x on a forward basis versus 3.15x.

An important consideration with this is that it does not take into account the earning potential in bitcoin. Another company allocating capital to bitcoin is MicroStrategy, and the company has a price/sales ratio of 53x on a forward basis.

It’s ironic that MicroStrategy is a loss-making company making an oversized directional bet on the world’s largest cryptocurrency, while Block is making calculated acquisitions and growing as a profitable payments company and looking to be the industry leader in bitcoin mining.

For this investment thesis, the downside risk is that Square and CashApp will be removed as payment options. However, the recent news that CashApp was recently integrated into Google Play gave me confidence that the platform is relevant and growing. I also believe that the recent capital increase was done to load bitcoin or start an acquisition.

Conclusion

The global manager of one of Silicon Valley’s most famous venture capital funds has decided to load up on Block Inc.’s stock again. His $27.5 million buyout at the end of 2023 was followed by a $25 million buyout in the last week. If Silicon Valley’s most famous investors are sinking, maybe we should follow. Former PayPal CFO Roelof Botha committed substantial personal capital to Block Inc. in the last six months. The company is growing profitably as a diversified payments company, embracing artificial intelligence, and trading at a discount to its industry peers without considering its bitcoin holdings. The company is also testing its own chips with a plan to diversify into bitcoin mining. This could lead to an increase in the company’s bitcoin asset holdings and a valuation more in line with other bitcoin holding firms. I am happy to buy Block Inc. to its current valuation and trajectory, but in my opinion, I feel there may be game-changing news or business moves that add fuel to the fire.