3 things the doubters could be missing about Block shares

Block has tumbled almost 60% from its highs. So is it a buying opportunity for investors?

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Payment and digital banking company Block (NYSE: SQ) has struggled over the past several months, falling nearly 60% from its all-time highs as of Monday's prices. Investors have soured on the stock, flocking to more defensive companies; meanwhile, tech giant Apple's (NASDAQ: AAPL) decision to launch iPhone payment terminals, becoming a direct competitor with the Square seller ecosystem, could be making sentiment worse.

A company's path is not always smooth or straightforward, and understanding the difference between fundamental problems and temporary distractions is key to identifying good buying opportunities. Is Block a broken stock or a broken company? Here are three key points to consider when considering Block shares.

1. Digital banking through Cash App

When boiled down to its most simple form, Block's business makes it simple to move money between people and merchants. For merchants, the seller ecosystem has grown from a payment terminal into an all-in-one hardware and software package that merchants can use to run their businesses.

However, Cash App has emerged on the consumer side; what started as a simple app for peer-to-peer payments, like "Hey, send me $10 for pizza last night," has steadily involved into a feature-rich app capable of handling the majority of your financial needs. Users can now deposit checks, buy stocks and Bitcoin (CRYPTO: BTC), and order the Cash Card, a debit card that draws from your Cash App balance, like any bank card.

In its most recent quarter, Cash App generated $512 million in gross profit, a 33% year-over-year increase. The company focuses on gross profit instead of revenue because Bitcoin trade volume inflates revenue but adds almost no gross profit to the business. According to data tracking company App Annie, Cash App's momentum appears strong; it was a top 10 smartphone app in the US in 2021.

Cash App is disrupting banking, creating digital tools for its users to manage their money. Block benefits from lower customer acquisition costs because there are no buildings to manage or staff to pay. Traditional banks still control most consumer wealth, but Block's younger users could mean more market share for the company over time. It opened the app up to users aged 13-17 in 2021.

2. Square seller ecosystem versus Apple

Apple made headlines by announcing that merchants could soon use their iPhones as payment terminals, but how much of a threat is this to Block? Nobody will know for sure until it plays out over future quarters, but I suspect it won't be as significant a threat as one might think.

Consider the value that the Seller ecosystem has today. The payment terminal itself is a small piece of the value that Block has built. Frankly, it's not the payment terminal that's the secret sauce. Instead, it's the many tools Block offers through the Seller platform, including point-of-sale, inventory management, marketing, gift cards, loyalty programs, banking, and more.

There's so much that the ecosystem can do that it probably doesn't make sense for many merchants beyond the most basic to leave it in favor of Apple's payment terminal. Apple could always prove otherwise, and perhaps its tap-to-pay gains serious traction, but I'm willing to give Block the benefit of the doubt for now.

3. Afterpay could drive growth moving forward

The negativity surrounding Block has washed away much of the positivity around its acquisition of buy now, pay later company Afterpay, which recently closed. Block's wasted no time rolling out features, including adding buy now, pay later features to its Seller ecosystem and plans to integrate it with Cash App too.

Afterpay already had roughly 98,000 merchants on its platform, selling to more than 16 million active users. Sales on Afterpay, the value of transactions on the platform, grew 102% to $22.4 billion in 2021, generating $693 million in net revenue for the company. Afterpay also gives Block more international exposure; the company has a large footprint in Australia, North America, and a presence in the United Kingdom.

According to Allied Market Research, the buy now, pay later industry could grow more than 40% per year to reach nearly $4 trillion in transaction volume by 2030. Afterpay gives Block direct exposure to this growth, both as a stand-alone buy now, pay later business and as a tool for bringing potential new users into the Seller and Cash App ecosystems.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Justin Pope has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns and has recommended Block, Inc and Bitcoin. The Motley Fool Australia has recommended Apple. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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