During the 2010s, Block (NASDAQ:SQ) stock benefitted as the company innovated itself to the top among America’s transaction processors.
Instead of looking for customers through banks or re-sellers, and building a complex system of special deals, Block went directly to merchants.
It offered simple pricing, and a dongle that worked on a mobile phone. It expanded by offering loans and then banking services to those merchants and grew steadily.
In this decade, however, Block stock has been faltering. It’s down 11% in 2023, while traditional processors like Fiserv (NYSE:FI) are up 20%.
Block stock fell hard after releasing second quarter earnings, where it showed a loss of $122.5 million, 20 cents per share, on revenues of $5.5 billion.
What are analysts worried about?
A Closer Look at SQ Stock
Block is no longer just a financial company. It also owns Tidal, a streaming music service. There are also Spiral and TBD, which develop software around Bitcoin.
When you buy Block, you’re buying the mind of co-founder Jack Dorsey, who made himself a billionaire through the company.
Dorsey is one of a pack of tech bros now trying to control the world. In his case, that means Bluesky, a social network he founded after another tech bro, Elon Musk, turned Twitter (which he also co-founded) into X.
It also means a steady devotion to Bitcoin, the fake computer-generated money that has made, and unmade, several fortunes over the last few years.
The specifics of Dorsey’s distractions don’t matter. What matters is that they exist. They reside on Block’s books, and that if Dorsey wants to put more distractions there, he’s free to do so.
The Cash cow for Block is Cash. The Cash instant payments app generated $968 million in gross profits in the second quarter. It’s growing at 37% per year, and represent more than half of Block’s total gross profit.
Growth in Cash’ user base, however, is slowing.
Bulls like our David Moadel love to talk about Cash. They also love to talk about Block’s Earnings Before Income Taxes, Depreciation and Amortization, or EBITDA. Block should have $1.5 billion of EBITDA this year, most of it supplied by Cash.
My trouble is that you talk about EBITDA when you don’t have real earnings to talk about. Block lost $540 million last year and has lost $140 million more in the last two quarters.
Cash is also a maturing business. So is the merchant processing business. At this point in their development these should be delivering big profits to shareholders.
The fact that they’re not is down to Block’s other operations, one reason our Louis Navillier says stay away. Paypal (NASDAQ:PYPL) remains a potent competitor in instant payments, and that stock is much less expensive than Block on an earnings basis, he writes.
But some of Block’s merchant processing competitors, including FiServ, are already listed as users. As consumer applications develop for Fiserv, everyone in the industry needs to be wary.
The Bottom Line
But when I combine Dorsey’s devotion to Bitcoin with growing competition for Cash, I see trouble. I think Dorsey’s instinct for innovation is going in a dangerous direction. While Square innovated alongside the banking system, Block is now innovating against it.
If you believe in Bitcoin, and don’t believe in the government, buy Block.
I’ll take Fiserv and companies like it.
As of this writing, Dana Blankenhorn did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.