Is Block stock worth buying?

This S&P500 recently surged to new record highs following the Federal Reserve’s first rate cut in two years. While the broader market index continues to rise, that doesn’t mean there aren’t opportunities for patient investors today.

Block (NYSE: SQ) is one stock that is still 76% below its all-time high from more than three years ago. The company has taken a leaf out of the larger tech playbook and is trying to cut costs and become more efficient to improve margins and bottom line. It’s making solid progress on its initiatives, but is that enough to buy the stock today?

Block’s rapid development came at a high cost

Block offers a suite of financial products that appeal to businesses and individuals. The company’s original product, Square’s sales system, enables businesses to process payments and manage sales and inventory. First introduced in 2009, this groundbreaking technology allows small businesses to quickly and easily accept payments using a smartphone or tablet and helped usher in a new era of digital payments.

The company also offers the Cash App, which is one of the most popular investing apps among all generations, according to The Motley Fool’s Generational Investing Tools study. Through the Cash App, customers can access banking services, invest in stocks and Bitcoinand manage payments through Afterpay, Block’s buy now, pay later service.

Block’s growth over the years is undeniable. Since 2017, Block’s total revenue has grown from $2.2 million to nearly $22 million last year, a compound annual growth rate of 46.5%. This strong growth is fueled by growing transaction revenue sales, subscription and service revenue from Cash App, and Bitcoin-related revenue from customers purchasing Bitcoin through Cash App.

Despite solid revenue growth, Block’s expenses grew faster. The company’s net income fell every year from 2019, when it earned $375 million, to 2022, when it posted a net loss of $541 million.

SQ revenue data (TTM) by YCharts.

It wasn’t until last year that the fintech began to rein in its expenses that CEO Jack Dorsey laid out a long-term plan to get Block back on track. Dorsey’s goal is the “rule of 40,” under which Block will aim to grow gross profit plus adjusted operating margin by a combined 40% by 2026. The primary goal of this goal is to help the company improve its margins and achieve growth as efficiently as possible.

What’s next for Block?

Last year, Block announced plans to cut its headcount to 12,000 to keep expenses low. Dorsey said, “We expect to maintain that cap until we determine that business growth significantly outpaces business growth.”

So far, the company’s cost-cutting efforts are paying off. Through the first six months of the year, Block’s net income is $667 million, up significantly from last year’s net loss of $3.7 million.

To achieve more efficient growth, Block intends to better integrate all of its product offerings into one entity. Interestingly, Dorsey told investors that Block’s ability to integrate Square and Cash App “enables us to deliver consumer experiences that others can’t, especially in commerce.”

In a memo to employees in July, Dorsey told employees that Block would eliminate its business silos and dissolve its business unit reporting structure. Dorsey wants to return Block “to how we started as a company” and address Block’s “triple pain points” of “collaboration, craft, and agility.”

Image source: Getty Images.

Is Block worth buying now?

While the restructuring aligns with Dorsey’s previous comments, Macquarie analysts, as reported by The Fly, are concerned that Block is making “slower progress on initiatives.” For Block stock holders, that could mean a rebound in the near future may not be possible.

But I’m optimistic that a restructuring is the best move in the long term. The company’s Cash App is well-positioned, especially among younger investors, and better integration with Square and Afterpay could give its payments network a big boost.

Block still has some way to go, but it has shown solid progress this year as its net income continues to improve. The stock is currently trading at a price-to-earnings (P/E) ratio of 15.2 based on year-to-date earnings, which could be an attractive entry point for long-term investors.

If you are not convinced, you should monitor the company’s financial performance over the next few quarters and wait for confirmation that the company is making further progress toward its goals.

Is it worth investing $1000 in Block right now?

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Courtney Carlsen has positions in Bitcoin and Block. The Motley Fool has positions in and recommends Bitcoin and Block. The Motley Fool has a disclosure policy.