Block (SQ) Stock: A Deep Dive into the Reasons to Buy and Avoid

Reason to buy: Two thriving ecosystems

Investors probably know Block by its former name, Square. But these days, Square is the name of the company's merchant-focused segment. It offers a wide range of hardware, software, and financial services that help business owners better run their operations, including point-of-sale devices, marketing tools, loyalty programs, team management, and working capital loans.

Then there's Cash App, an extremely popular personal finance tool that's currently the top-ranked finance app on the Apple App Store. Not only can users send money to other users on Cash App, but they can buy stocks, set up direct deposit, do their taxes, and sign up for a debit card. For about 56 million monthly active users, Cash App is becoming a banking substitute.

Both of these segments continue to experience rapid growth. Square and Cash App posted gross profit gains of 18% and 25%, respectively, in 2023. By constantly introducing new features, it's not too difficult for Block to continue to add more users, boost payment volume and engagement, and monetize this activity.

Reason to avoid: Lack of consistent profits

As is the case with many other growth-oriented businesses, Block has foregone bottom-line performance in the name of rapid expansion. The net loss totaled $541 million in 2022. The business has yet to be fully profitable on a sustainable basis, even though it generated a positive net income of $9.8 million in 2023, thanks to a sizable Q4 profit. Some investors might view this as a dealbreaker.

This isn't surprising. When a management team sees a huge opportunity ahead, they plow resources into sales, marketing, and product development efforts. The hope is that profits can be achieved in the future at a much greater level of scale.

But founder and CEO Jack Dorsey is tightening the grip on the company. He has capped the employee headcount at 12,000. And Block is focused on driving greater efficiencies by reducing overhead costs.

The outlook calls for an adjusted operating income of over $1.1 billion in 2024. Wall Street is also optimistic, forecasting generally accepted accounting principles (GAAP) operating income of $842 million this year. This is encouraging, but unless the company can start posting consistency with this figure, then there will always be a financial risk, particularly with fears about how a recessionary period will impact the business.

Understanding the fact that Block has a long way to go when it comes to sustainable positive earnings, I still think the stock is worthy of a place in a long-term portfolio. Should you invest $1,000 in Block right now?