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Block Earnings: Strong Growth for Cash App and Better Profitability

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Securities In This Article
Block Inc Class A
(SQ)

Block SQ produced solid second-quarter results that we believe showed that the company is tracking in the right direction. We will maintain our USD 98 (AUD 147) per share fair value estimates for the narrow-moat company. We see shares as undervalued at the moment, but would highlight our Morningstar Uncertainty Rating of Very High.

The company’s Cash App business continues to see strong growth, with revenue up 39% year over year, excluding bitcoin revenue. We prefer to focus on revenue excluding bitcoin, as we see bitcoin revenue as basically as passthrough. However, we are encouraged by the recent rebound in bitcoin volume, as we believe the activity helps to engage users. We continue to see a long growth runway for Block’s Cash App business.

Square, meanwhile, saw growth come down sequentially even as revenue and gross payment volume were both up 12% year over year. We saw Clover’s volume growth slow sequentially as well, but Clover appears to still be modestly outperforming Square. Still, we are encouraged by the fact that Square continues to move upmarket in terms of merchant size and is drawing a larger percentage of revenue internationally. We see both trends as positive in terms of the company’s moat.

While Block continues to enjoy strong growth, we have been increasingly impatient to see this growth translated into better profitability and would be more encouraged by traction on the bottom line as opposed to the top line at this point. We remain confident in the company’s growth prospects, but see the long-term economics of the business as more uncertain.

On this front, we view the second quarter as modestly encouraging. Block swung to adjusted operating income of $25 million in the quarter, compared with a loss of $103 million in the year-ago period. Additionally, management raised guidance for the full year to adjusted operating income of $25 million. While this is directionally positive, Block has a long way to go to reach our long-term margin expectations.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Brett Horn

Senior Equity Analyst
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Brett Horn, CFA, is a senior equity analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers insurers and credit bureaus. He also oversees the equity research team’s stewardship rating methodology.

Before joining Morningstar in 2006, Horn worked in the banking industry for about a decade, most recently as a commercial loan officer for First Bank, where he was responsible for underwriting loans and managing relationships with middle market clients. Before that, Horn worked for Mizuho Corporate Bank, where he managed loan portfolios and client relationships, primarily with Fortune 500 companies.

Horn holds a bachelor’s degree in business administration, with a concentration in finance, from the University of Wisconsin and a master’s degree in business administration from the University of Illinois. He also holds the Chartered Financial Analyst® designation. He ranked first in the business and industrial services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey in 2013, the last year the survey was conducted.

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