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Technology Stocks : Block, Inc. (formerly Square)
SQ 62.36-3.5%Jun 13 4:00 PM EDT

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From: Glenn Petersen2/25/2022 8:08:31 PM
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Cash App Is King for Block Stock

A reacceleration of growth in the payments and neobanking app is reigniting investors’ faith in the fintech darling

By Telis Demos
Wall Street Journal
Updated Feb. 25, 2022 11:49 am ET

Block’s SQ 26.14% Cash App is money again for investors in the fintech giant.

Markets appeared to have lost faith in the hypergrowth potential of financial technology, with stocks such as Affirm, AFRM 1.24% Block and PayPal PYPL 5.64% all trading down more than 40% so far in 2022 as of Thursday’s close. A major concern has been that the digital payments and banking boom of the pandemic was a stimulus-driven one-off, or a pull-forward of years of future growth—and that digital finance won’t fundamentally disrupt banks or develop products that encourage long-term loyalty.

Now investors may find reasons for a renewal of optimism in results for Block’s Cash App, the neobank-like service that enables payments, deposits and more. Cash App was a major beneficiary of the disbursement of government checks during the pandemic. That had investors dreaming of a more rapid-than-anticipated evolution of Block into a digital banking giant. Then, as stimulus faded, Cash App’s year-over-year gross profit growth became progressively slower in the second and third quarters of 2021, with a sequential gross-profit drop from the second to the third quarter.

In the fourth quarter, though, Cash App stabilized. Gross profit was up a bit from the third quarter and rising at a faster year-over-year pace. That annual growth rate could dip again in the first quarter, when Cash App faces a tough comparison to the period when stimulus checks were sent out in 2021. However, the business appears to be on pace to grow gross profit sequentially again, judging by accelerating two-year-compound growth in March versus January and February. Block further said that it anticipated year-over-year growth rate improvements in the second half of 2022 for Cash App.

Perhaps most enticingly, Block attributed some of that growth to expansion of what Cash App does: newer services such as tax preparation, merchant payments and accounts for teens, as well as pricing adjustments. This may reignite the belief that Cash App is much more than just another digital stimulus-check deposit service to its newer users. Block shares surged on Friday after its earnings report, gaining about 20% in midmorning trading.

Given the market’s general distrust of growth companies right now due to risk aversion and rising interest rates, Block might struggle to make up for all of its recent valuation compression. It began 2021 trading at an enterprise value around 150 times next-twelve-months earnings before interest, taxes, depreciation and amortization. Now it fetches about 65 times—still above where it began at around 50 times.

There might be catalysts, though, for some additional gains. Block still is telling investors more about what it anticipates for revenue synergy with Afterpay, the buy-now, pay-later specialist it acquired recently—something especially needed as that sector is facing its own concerns about growth deceleration. The company is holding an investor day in May. Meanwhile, Block’s original Square business for sellers is picking up momentum, driven in part by further normalization of in-person shopping.

What all of this does is provide a stronger foundation for Block. But questions remain about how effectively it can fit its pieces together.

Write to Telis Demos at telis.demos@wsj.com

Cash App Is King for Block Stock - WSJ
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