I think financials are on the cusp of a new bull market, having survived the dual threats of recession angst and rising rates, asserts Adam Johnson, growth stock specialist and editor of Bullseye Brief.
Block (SQ), formerly known as Square, operates two fast growing businesses: Payments processing for merchants (Seller) and money management for people (CashApp). You’ve probably seen Square’s little white device that turns an iPhone into a cash register, but it’s more than that… real-time sales data feeds inventory replenishment, payroll, etc.
"Seller" is the legacy point-of-sale business that turned iPhones into cash registers with little square-shaped, plug-in credit card reader. Now it’s a fully integrated back-office platform that manages inventory, ordering and even payroll. Seller will likely generate over $6 billion in sales this year, accounting for 30% of firm-wide revenue.
"Cash App" is an entirely new business which looks a lot like Venmo on steroids. CashApp helps people transfer, trade and manage their money in real-time on a mobile device. Critically, CashApp has grown 12-fold since inception in 2019.
Fees are on track to reach $13 billion this year and account for 70% of Block revenue — 3x the legacy business. The consumer-facing side of the business is giving PayPal a run for its money, and there are significant synergies between the two operating units.
There's a lot going on here, including multiple synergies between the two divisions. Seller tracks e-commerce activity by category and integrates with inventory replenishment and reordering software, so items in demand are automatically restocked. Employee commissions associated with sales can be integrated with bi-weekly payroll. Customer preferences are stored, providing proactive marketing opportunities for e-commerce.
Meanwhile CashApp serves individuals. It’s like PayPal (PYPL), Visa (V) and Schwab (SCHW) all in one — allowing people to transfer money, pay for products and trade crypto. CEO Jack Dorsey sees significant cross-selling opportunities between Seller and CashApp.
Recently reported second quarter profits more than doubled, and Wall Street responded by raising estimates. I’ll add that the stock is down 75% from its high and trades at just 1.7 times sales, compared to an average of 5.5x since its IPO in 2015. Block is growing and it’s cheap. I'm reiterating my buy recommendation.
