Block Has Assembled the Right Pieces


Potential investors in




SQ -2.33%

might stumble over its bitcoin bets. But they don’t have to.

With the market turning against money-losing companies, the onus is on once highflying growth stocks to show a clear path to big profits. Block, the operator of both Square and Cash App, has the pieces to make a compelling case. Even if user or e-commerce growth slows, Block’s consumer Cash App is rapidly adding ways to monetize its existing users via additional financial services, as well as to help boost its Square seller business. Rather than adding still more users, this kind of per-user revenue expansion is what investors are looking for now across many fintech companies, ranging from PayPal to Robinhood Markets.

With Cash App, the average monthly active user brought in just over $1,000 to their accounts in the first quarter of 2022. And Cash App monetized those inflows into gross profit—defined as revenue minus certain transaction processing, bitcoin and hardware costs—at a rate of just under 1.2%. For an active customer in March doing direct deposit with Cash App, that increased their inflows on average by 6½ times compared with someone just using Cash App’s peer-to-peer payments service. On top of that, an active account in March that was an active user of the company’s debit-card, stock-trading or borrowing services increased their monetization rate on average to 1.7 times that of a peer-to-peer-only user.

This growing monetization over time beyond the peer-to-peer payment business has been one factor helping bring up Cash App’s structural margin—or the profitability of each additional dollar of gross profit less variable costs—to 37 cents last year, from just 4 cents in 2018. On top of that, when Cash App customers end up shopping at a merchant using Square payment services, that can drive even more-profitable transactions: The structural margin on Square gross profit was nearly 70 cents a dollar in 2021.

Block’s recent acquisition of split-pay service Afterpay can accelerate things, too. Only about 6% of Cash App annual active accounts were active Afterpay users as of the end of the first quarter. But in the first quarter, Cash App generated more than 350,000 leads to Afterpay merchants. More of those merchants may end up using Square’s payment services, too. Some large merchants that use Afterpay have already signed up to add Cash App Pay as a checkout option.

This kind of profit potential should appeal to investors, even in this market. However, Block’s overall margins also are affected by fixed costs. That includes spending on longer-term growth projects. Cash App’s all-in, or “fully burdened,” gross profit margin was 12% last year. From 2015 to 2021, Block’s total fixed expenses went from about 60% of gross profit to about 30%, though the company said it doesn’t expect to have fixed-expense leverage in the near term.

Part of what Block is investing in includes a bigger future for bitcoin and its ecosystem. Given crypto’s recent market implosion, some investors won’t be in the mood to pay for any bets on blockchain’s long-term potential for financial, creative and security purposes, which are all part of Chief Executive

Jack Dorsey’s

ultimate, uniquely bitcoin-focused vision. So Block’s shares might not soon overcome the gravitational pull of a bearish market.

Still, companies shouldn’t be overly penalized for longer-term investment. In the rapidly evolving digital money business, it is easy to get bypassed. Bitcoin also drives inflows, with the typical Cash App active bitcoin customer in March putting in nearly four times as much as a peer-to-peer-only user. Block says it plans for under 3% of core operating expenses to go to “emerging initiatives,” and it is prepared to scale back on spending if needed. A lot of spend right now is also going toward integrating Afterpay—which does have a strong link to profitability, as well as to international expansion.

Investors sifting through the carnage in growth stocks shouldn’t dismiss Block as a key piece of a future fintech portfolio.

WSJ’s Dion Rabouin explains why Wall Street is now betting big on crypto and what that means for the new asset class and its future. Photo composite: Elizabeth Smelov

Write to Telis Demos at [email protected]

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