When Square changed its name to Block Inc. (NYSE: SQ) in 2021, it did so to reflect a new beginning as the company grew beyond just being a payment processor. The company embarked on developing multiple ecosystems, creating a diversified portfolio of services under one umbrella. Today, the company is not only a member of the Computer and Technology sector but could also qualify for the Financial Services sector as an FDIC chartered shadow bank.
It has evolved into a triple threat with three distinct segments creating value for investors. Its POS and e-commerce payments segment is Square. It also has a Bitcoin and blockchain segment and a buy-and-pay-later BNPL arm. However, the stock is impacted by headlines that affect each segment as if they are three individual stocks in one. It's like owning a piece of PayPal Holdings Inc. (NASDAQ: PYPL), Coinbase Global Inc. (NASDAQ: COIN) and Affirm Holdings Inc. (NASDAQ: AFRM) in one stock. Check out the sector heatmap on MarketBeat.
Cash App personal finance ecosystem
The Cash App has grown beyond a peer-to-peer (P2P) payment platform. It has evolved into a one-stop shop for personal finance. Users can send and receive money for free between Cash App users and for a 1.5% transaction fee when sent to an e-mail or phone number. Cash App can be used for exclusive discounts for e-commerce and POS purchases. Cash App allows users to invest in stocks with zero commissions and Bitcoin for a spread fee. Cash App is the fastest growing ecosystem for Block, with over 55 million transacting activities in September 2023, up 11% YoY.
Users can also get a free debit card, Cash Card, for purchases anywhere that accepts Visa Inc. (NYSE: V). Cash Cards can be used for ATM cash withdrawals and also receive direct deposits. Cash App credentials can be used for Afterpay purchases and a repayment method.
Square merchant network ecosystem
Square continues to grow its network for merchants who use it as a payment processor. Square was one of the first fintechs to provide merchants, independent contractors and small businesses with a portable credit card reader that could plug into a smartphone or tablet to process payments. Cash App users can discover and get discounts with Square merchant network sellers and opt for Afterpay payment plans on purchases. Square Financial Services was the first U.S. bank to receive an FDIC charter to operate as a bank. This allows them to take deposits for its merchants into an interest-bearing, FDIC-insured savings account.
Growth still growing
On November 2, 2023, Block reported its Q3 2023 earnings for September 2023. The company reported non-GAAP EPS of 55 cents, beating consensus analyst estimates of 47 cents by 8 cents. Revenues grew 24.4% YoY to $5.62 billion, surpassing the $5.42 billion consensus analyst estimates. Block also owns the TIDAL global music platform Spiral and TBD, an open developer platform for blockchain technology access.
Robust Q3 2023 metrics
Transaction-based revenues grew 9% YoY to $1.66 billion. Square processed $60.08 billion in gross payment volume (GPV) in the quarter, up 10% YoY. It generated $899 million in gross profits, up 15% YoY.
Cash App generated $3.58 billion in revenues, up 34% YoY. It generated $984 million in gross profit, up 27% YoY. Inflows per transacting active averaged $1,132, up 8% YoY.
Afterpay, BNPL contributed $94 million in gross profits to Square and Cash App in the quarter. General merchandise value (GMV) rose 24% YoY to $6.7 billion. Block will move the BNPL platform into the Cash App to provide better customer experiences. It will report BNPL 100% into Cash App results rather than the 50% split between Square and Cash App.
Block expects Q4 2023 adjusted EBITDA of $430 million to $450 million. Full-year adjusted EBITDA is expected to be around $2.4 billion. Gross profit is expected between $1.96 billion to $1.98 billion, reflecting 19% YoY growth. The company expects Square gross profits to grow 15% from the third quarter of 2023. Cash App is expected to moderate its growth from the third quarter of 2023 since it is lapping tough, strong comps from Q4 2022.
CEO Cash App insights
Block CEO Jack Dorsey noted that Cash App received more than $8 billion in direct deposits and over $2 billion in paper money deposits in the quarter, up over 40%. He commented, "And the most notable within commerce is how we bring in local commerce, especially within a Cash App view. That is our superpower. And I think the world is going to want more local experiences. Much retail is becoming increasingly monotone on the internet, and people are looking for more unique experiences, and that's where we fit in, and that's where our strength is…"
Dorsey also noted that the company's focus on Bitcoin is under the belief that the internet needs to have a native currency to enable global micropayments.
It's all about the ecosystems' network effect
The synergies between ecosystems are meant to foster the network effect as customers continue to use more services within the Block portfolio. For example, a new user could initially try the Cash App to send and receive money from friends when they split a restaurant check. The P2P transactions among family and friends are inherently a social feature that allows for word of mouth to spread about the Cash App amongst the social group.
The user then discovers they can get a free Cash Card for purchases and learns they can use the Cash App to receive discounts on brands they shop for. Furthermore, they discover they can buy products from Square merchants on an Afterpay BNPL payment plan.
With that in mind, the user implements direct deposit into their Cash App to fund the debit card and automatically makes their Afterpay installment payments. Plus, the user discovers they can invest in Bitcoin and make zero-commission stock trades. This prompts them to add funds to their Cash App to trade and invest. Word of mouth helps bring new customers to Block, and the ecosystem's network effect helps retain them and keep them transacting.
Daily descending triangle breakout
The daily candlestick chart on SQ indicates a descending triangle breakout pattern. The descending trendline formed at a $59.89 peak on September 6, 2023. SQ cascaded lower, forming lower highs on bounces and rejecting off the descending trendline. The flat-bottom trendline formed at $40.77 on October 5, 2023, as SQ staged a rally on the breakout through the daily market structure low (MSL) trigger at $44.05. However, the descending trendline proved too strong a resistance, sending shares back under the lower trendline until its Q3 2023 earnings release triggered a 12% gap and grind higher. The daily relative strength index (RSI) hovers below the overbought 70-band. Pullback support levels are $48.15, $45.63, $44.05 daily MSL trigger and $42.77.