Block Sees Strong Growth in Q4 2022

Narrow-moat Block SG continued to show its ability to generate strong top-line growth in the fourth quarter, but historically the company has struggled to turn this growth into better profitability. Results this quarter and management’s guidance for 2023 suggest that this will remain the case in the near term, although management outlined a framework to assess and improve long-term profitability on its call. We will maintain our $104 fair value estimate. We believe shares are undervalued but would stress our Morningstar Very High Uncertainty Rating.

The Cash App business maintained its recent momentum in the fourth quarter. Reported results were dragged down by a 7% year-over-year decline in bitcoin revenue. However, excluding bitcoin revenue (which is essentially a pass-through item, in our view) and the acquisition of Afterpay, revenue increased 51% year over year. We think the strong bounce back this business saw in the back half of the year highlights the strong long-term growth prospects for this business.

The Square business saw growth slow in the quarter, mirroring trends we saw at peers. Excluding Afterpay, revenue grew 10% year over year, driven by a 14% increase in payment volume. On the negative side, volume growth continued to slightly lag what we are seeing from peer Clover. On the positive side, the percentage of gross profit coming from international markets increased to 12% from 6%, excluding the impact of Afterpay. We believe that the Square model should be portable to foreign markets, and are pleased to see management executing on this potential.