Expanding Cash App Features And Bitcoin Initiatives Will Improve User Engagement

Key Takeaways

• Block's ecosystem expansion and strategic investments aim to boost customer engagement and acquisition, positively influencing revenue growth and net margins.
  
• Product innovations and Bitcoin-related initiatives are set to enhance revenue streams and profitability through improved offerings and digital currency adoption.
  
• Delays in benefit realization, regulatory risks, and economic uncertainties could impact Block's revenue growth, margins, and cash flow predictability.

Catalysts

Block, Inc., together with its subsidiaries, builds ecosystems focused on commerce and financial products and services in the United States and internationally.

• Block is focused on expanding its ecosystem of lending products, including Cash App Borrow and Afterpay on Cash App Card, which is expected to increase customer retention and engagement. This is likely to impact revenue positively as more customers adopt and use these financial services.
  
• The company is investing in go-to-market strategies, particularly for Square and Cash App, including increased field sales hiring and marketing. These efforts are anticipated to drive customer acquisition and growth, which should enhance revenue and potentially net margins due to improved operating leverage.
  
• Block plans to implement product innovations, such as Square's new order platform and enhanced POS systems, which are expected to improve product offerings and customer experiences. These developments are likely to boost sales volume and, consequently, revenue.
  
• The company aims to expand its Cash App user base and increase ARPU through incentives and new feature launches, such as Cash App Pay and the integration of Afterpay. This strategy should contribute to revenue growth and improve net margins by increasing the monetization of active users.
  
• Block is committed to scaling its Bitcoin-related initiatives, including mining and the Cash App exchange, amid potential regulatory clarity. This focus may lead to new revenue streams and enhance profitability by leveraging growing interest and adoption of digital currencies.

Block Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Block's revenue will grow by 11.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.4% today to 7.6% in 3 years time.
• Analysts expect earnings to reach $2.5 billion (and earnings per share of $4.0) by about December 2027, up from $1.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $3.4 billion in earnings, and the most bearish expecting $1.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.3x on those 2027 earnings, down from 55.6x today. This future PE is greater than the current PE for the US Diversified Financial industry at 17.9x.
• Analysts expect the number of shares outstanding to grow by 0.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.96%, as per the Simply Wall St company report.

Block Future Earnings Per Share Growth

Risks

• The delay in realizing benefits from a partner transaction cost benefit and the shift in expansion of Cash App Borrow into 2025 could impact projected gross profit growth and create unpredictability in cash flows.
  
• The need for greater regulatory clarity around fintech and banking products, including Cash App and other lending products, could introduce compliance risks and potential expenses, impacting net margins if regulatory costs or penalties arise.
  
• Investments in sales and marketing, while expected to drive future growth, might temporarily inflate operating expenses and pressure net margins in the short term if returns are not realized as anticipated.
  
• Challenges in customer acquisition and retention, particularly for existing products like Cash App, could impact growth projections and revenue scaling if innovative features or market strategies do not effectively attract and retain users as anticipated.
  
• Potential economic uncertainties, such as changes in consumer behavior during holiday seasons or macroeconomic shifts, could affect Gross Payment Volume (GPV) growth projections, leading to revenue volatility if consumer spending patterns change unexpectedly.

Valuation

• The analysts have a consensus price target of $95.89 for Block based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $125.0, and the most bearish reporting a price target of just $40.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $32.6 billion, earnings will come to $2.5 billion, and it would be trading on a PE ratio of 29.3x, assuming you use a discount rate of 7.0%.
• Given the current share price of $94.55, the analyst's price target of $95.89 is 1.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.