Block Earnings: Strong Growth and Modest Improvement in Profitability

Block SQ continues to see strong growth, with overall net revenue up 26% year over year. However, we would like to see this growth translate into better profitability. On this front, the quarter suggested some modest improvement. Overall, though, we don’t see anything in the quarter that would materially alter our long-term view and will maintain our $98 fair value estimate for the narrow-moat company. We see shares as undervalued but would stress our Morningstar Very High Uncertainty Rating.

The Cash App segment continues to enjoy explosive growth, with revenue (excluding bitcoin revenue) increasing 52% year over year. We prefer to exclude bitcoin revenue, which we see as effectively a pass-through item, but believe it is worth noting that bitcoin revenue, which has been a consistent drag over the past year or two, appears to have turned a corner, growing 25% year over year. We see a long growth runway for this side of the business, but also believe that there is significant uncertainty surrounding the long-term economics of this business.

The Square segment increased revenue 15% year over year, driven by 17% volume growth. While these numbers remain strong in an absolute sense and support the idea that the business still has substantial growth prospects, Fiserv’s Clover continues to modestly outperform Square. On the other hand, we remain impressed with recent growth in foreign markets, which now make up 16% of gross profit, compared with 13% last year.