Summary

Block, Inc. is trading at ~16-17x earnings, well below its 12-month average of ~30x. It's a steep discount of about 47% for a business that's still growing and throwing off cash. The drop is mostly tied to regulatory headaches, but the fundamentals look solid enough that investors may find a compelling entry point.

What they do

Block has two main offerings:

Square - merchant services for ~4 million small businesses
Cash App - consumer payments with ~57 million monthly users

On top of that, they've added Bitcoin, BNPL (Afterpay), and even music (Tidal) to their offerings. In 2024, Block processed ~$241B in payments, making it one of the big names in fintech.

Their Moat

A lot of people currently use their Cash App, so it's harder to part ways with their services. With 57M users, they've hit scale.
Merchants using multiple Square products make up 44% of their gross profit. Their users are generally sticky.
They utilise data analytics - transaction data sharpens lending, fraud detection, and new product design.
The run at scale, which means having bigger volume of sales means more efficient marketing and stronger tech spend.

Financial Health

Q3 2024: $284M net income vs. a $89M loss last year.
Gross profit: +19% YoY, hitting $2.25B.
Cash App gross profit: +21% YoY, $1.31B.
Liquidity: $10.7B on hand.
Debt: $2B in long-term notes, manageable.
Buybacks: $4B approved, signaling confidence.

Rewards

Better margins - disciplined costs, higher-margin services, cross-selling.
Bitcoin edge - they're betting big on Bitcoin across products. Risky, but unique.
Lending play - Square Loans, Afterpay, Cash App Borrow; AI-driven underwriting; manageable loss rates (1-4%).
Small business stronghold - Square has deep roots in SMB payments, tough for competitors to replicate.

Risks

Regulation - Recent $120M in fines, DOJ probe, and compliance issues (incl. flagged Russian accounts). Fixing this won't be cheap.
Slowing revenue - Q3 2024 missed estimates. Ex-Bitcoin, growth is moderating.
Bitcoin volatility - Crypto swings can whiplash results.
Competition - PayPal/Venmo, Toast, and banks aren't standing still.
Leadership focus - Jack Dorsey's Bitcoin obsession could distract from the core business.

Valuation snapshot

Under a three-year projection with 6% annual revenue growth and a 10% profit margin, Block's earnings power scales steadily from its current base. Applying a 25× future P/E multiple to those projected earnings yields an implied future share price of ~$97.

Discounted back at a 7.7% cost of equity, the present value comes in above today's market price of $77.

This suggests ~20% upside under moderate, achievable assumptions of steady growth, disciplined margins and a multiple consistent with peers. Upside exists if revenue growth accelerates or margins expand; downside risk lies in competitive pressures or slower adoption.

Market Cap: US$46.33 billion

Revenue (TTM): US$23.83 billion

Net Income: US$2.96 billion

EPS (earnings per share): $4.83

Current Net Profit Margin: 12.41%

Current Revenue Growth: 8.79%

Upside: faster user growth, better monetization, margin expansion, new products or markets, lower costs.

Risks: macroeconomic headwinds, competition, regulatory risks, margin compression, disappointing growth.

Bottom Line

Block has strong fundamentals and is at a big discount due to temporary headwinds. The market has currently priced in a lot of regulatory risk... perhaps too much?

Regulatory cleanup is the main execution risk, but it appears to be solvable.

Therefore Block looks like an attractive risk/reward if you are willing to be patient with at least a 2-3 year horizon.

Disclaimer

PTrain is an employee of Simply Wall St, but has written this narrative in their capacity as an individual investor. PTrain holds no position in NYSE:XYZ. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. This narrative is general in nature and explores scenarios and estimates created by the author. The narrative does not reflect the opinions of Simply Wall St, and the views expressed are the opinion of the author alone, acting on their own behalf. These scenarios are not indicative of the company's future performance and are exploratory in the ideas they cover. The fair value estimate's are estimations only, and does not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that the author's analysis may not factor in the latest price-sensitive company announcements or qualitative material.