It’s been a tough year for shares of fintech payments platform Block (NYSE:SQ), as they trade down (-58%) on the year. The old adage “it’s better to have it and lose it than never to have it at all” is what optimistic investors need to remember every day. The pandemic has been a boon for e-commerce and payment companies like Block, PayPal (NASDAQ:PYPL), Shopify (NASDAQ:SHOP), Ali Baba (NASDAQ:BABA), Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AMZN) : AAPL) as consumers migrated to the digital economy, which includes payments and investing. Bitcoin’s dramatic rise to over $64,000 has boosted Block’s profits, accounting for almost 70% of its total revenue in 2021. Unfortunately, the tragic collapse to $20,000 has left many bag holders in its wake, diverting attention from its other segments. Sentiment has taken a full dive as consumer spending rein in due to rising inflation and bitcoin prices don’t appear to be bouncing back too much past the $20,000 level. As the hangover wears off and the extreme year-over-year (YoY) comps of 2021 follow, investors can reevaluate the strengths of Block’s ecosystems and their cumulative multiplier effect.
Network effect of ecosystems
At its core, Block successfully demonstrates how the network effect associated with a one-stop-shop strategy that enables layered services connecting merchants to consumers can have a multiplier effect on revenue. As the bitcoin mania has died down, investors can focus on the main drivers of its business. The two main ecosystems are the Square payment processing platform and the $Cash merchant network and app. Bitcoin transactions are made through the $Cash app. The key point here is that while bitcoin prices have fallen, transaction volumes for its two ecosystems have continued to grow by double digits.
Legacy Square Ecosystem
Square is the legacy business that enables medium and small businesses down to one person to accept and process credit card and digital payments. The business continues to grow at a slower pace as competition is plentiful. The Square for Restaurants product suite that enables first-party and third-party integrations for sellers. Its product line restaurants allow restaurants of any size to control various aspects of their business, from point of sale (POS) to delivery orders and team management. Its platform makes it easier for new Square businesses to import menus or create automated menus from PDFs, photos, or websites. In-person integration has been added for Square sellers in the US and Australia.
$Cash app ecosystem
The $Cash app is the main driver of growth as it continues to add features that allow consumers to make digital payments, invest in stocks and bitcoins, and find deals on products and services. The $Cash app becomes the central hub for its consumers beyond payments. It is a discovery tool to find products, brands, offers and companies. Like Acorns, the Cash App has also added a Round Ups feature that allows users to invest alternate currency rounded to the nearest dollar on Cash App Card purchases in stock or Bitcoin. As a one-stop hub for transactions, $Cash App’s only real competitor is PayPal and its Venmo app.
Back to normal
Block’s recent quarter could bring the company back to a normal baseline after digesting pandemic gains as annual offsets become more reasonable. On August 4, 2022, Block announced its second quarter 2022 results for the three months ended June 2022. The company reported earnings per share (EPS) of $0.18, beating analyst consensus estimates of $0.20. , by $0.02. Revenue fell (-5.8%) year-over-year (YoY) to $4.41 billion, beating analyst consensus estimates of $4.33 billion. Higher operating expenses caused adjusted EBITDA to drop to $187 million from $360 million in the same period a year ago. A large part of operating expenses is related to the Afterpay platform. Square generated $681 million in gross profit, up 16% year-on-year, excluding Afterpay’s gross profit of $75 million. Afterpay added $150 million in gross profit split between Square and $Cash App. $Cash App Business GPV grew 4% year-over-year to $4.2 billion. Cash App generated gross profit of $705 million, up 29% year-over-year or 15% excluding Afterpay. The $Cash app generated $116 million in transaction-based revenue, up 5% from increased business accounts and transactions.
Here’s what the charts say
Using the rifle charts over a weekly and daily time frame provides an accurate view of the landscape for the SQ stock. Rifles chart weekly uptrend peaked near $92.29 Fibonacci level (fib). The weekly 5-period moving average (MA) support begins to decline at $71.53 with the 15-period MA at $73.83. The weekly stochastic continues to rise but is slowing down to the 50 band. The weekly weak market structure (MSL) buy triggers on the breakout of $71.01. Weekly upper Bollinger Bands (BB) compress to $110.70 with weekly BBs lower at $46.64. The daily chart for Rifles trended lower with a decline in the 5-period MA resistance at $68.67, followed by the 15-period MA resistance at $75.30 with the 50-period MA at 73, $24. The daily BB lower sits at $58.06. The daily stochastic made a full swing down in an attempt to bounce off the oversold 10 band. Attractive pullback levels are found at the level of $66.27, $62.88, $59.79, $56.01, $53.31 and $48.48.
Block CEO Jack Dorsey said, “We continue to make progress by connecting our ecosystems. The relationships we build with Afterpay are what set us apart and make us so valuable to our customers. In Cash App, we are just beginning to integrate Afterpay’s discovery capabilities into our ecosystem. The biggest combined opportunity we see is in trading. Afterpay will introduce discovery and shopping to build on the elements that Cash App has already built around commerce, like Cash App Pay and Boost. We believe our new design with Cash App will allow us to develop new products and drive deeper engagement. We’re rolling out a new Discover tab in the main navigation, making it easier for customers to find and use brands and products that can save with Boost and pay with installments with Afterpay.
Afterpay Omnichannel Energizer
Afterpay is a buy-it-now, pay-later (BNPL) service that Block integrates into its Square and $Cash app ecosystems. This closes the loop of the transaction sequence. It offers customers the ability to pre-purchase items and make installment payments seamlessly from the app or online. It has been proven to boost merchant sales and consumer spending. It is an omnichannel tool that will allow network sellers to help increase online and in-person sales. Afterpay omnichannel customers spent 3x more than single channel consumers in 2021. This is driving growth as it adds another layer of fees to merchants and customers with every sale. $Cash app users can use Afterpay to seamlessly purchase items on a convenient payment plan that can automatically withdraw funds from the connected banking source. Afterpay is an energizer that will strengthen both the Square and $Cash App ecosystems. A rise in bitcoin prices is just the icing on the multi-layered cake. In a nutshell, Square and $Cash App business grew 29% YoY while bitcoin fell (-60%). The stock is down (-58%) over the year. Roll back the bitcoin price decline and you still have a solid growth company with its core business growing at an annual rate of 29%.
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