The crypto winter that has plagued the markets for the past year appears to finally be thawing. Bitcoin (BTC-USD) and other major cryptocurrencies have seen substantial rallies in recent weeks, sparking optimism that the bear market may be ending. One stock that stands to benefit tremendously from this changing crypto environment is Block (NYSE:SQ).
Block has invested heavily in growing its crypto capabilities over the past several years through its Cash App, and has faced intensifying competition. But the company’s fundamentals remain strong. With profitability potentially on the horizon in 2023, now could be an opportune time to take a position in Block while valuations remain depressed from the crypto downturn.
Strong Q2 Performance Positions Block for Profitability
Block recently delivered an (adjusted) earnings beat for Q2 2023, laying the groundwork for a return to profitability. Revenue grew 26% year-over-year to $5.5 billion, surpassing estimates by $433 million. Meanwhile, the company’s earnings per share of 39 cents reversed a loss in the prior-year quarter and trounced expectations by 2 cents.
Digging deeper, the strong quarter was driven by Block’s two core ecosystems, Square and Cash App. Square, focused on serving sellers, generated gross purchase volume (GPV) growth of 12% to reach $888 million in gross profit. Cash App, the digital wallet and peer-to-peer payment network, grew even faster at 37% to reach $968 million in gross profit.
Cash App has been a particularly strong growth engine, scaling to over 54 million monthly transacting active customers, up 15% year-over-year. With products ranging from stock trading to Bitcoin purchases, Cash App is rapidly expanding its addressable market and increasing monetization. This has Wall Street analysts forecasting around 15% annual revenue growth for Block through 2030.
Block Maintains Competitive Edge Over PayPal
Competition in digital wallets and payments remains fierce, with PayPal representing Block’s largest rival. However, Block appears better positioned, in my view, given PayPal’s recent loss of user base momentum.
PayPal (NASDAQ:PYPL) grew active accounts by 23.6% in Q4 2020 but then saw growth slow dramatically, with accounts expanding just 0.5% in Q2 2023 so far. Engagement has weakened as well, with transactions per active account declining. This suggests PayPal is struggling to attract new users in a saturated market.
Meanwhile, Block continues demonstrating an ability to expand its customer base rapidly, especially among younger demographics. This is allowing the company to increase monetization through products like Cash App that drive higher engagement.
Simply put, Block is still in growth mode while PayPal seems to be maturing. This divergence puts Block in a better position to capitalize on emerging digital payment trends in e-commerce and areas like artificial intelligence.
Crypto Tailwinds Could Provide a Catalyst
With Bitcoin jumping over 27% from its October lows, renewed crypto optimism could provide an extra catalyst for Block. Block has invested heavily in crypto capabilities given the large and growing total addressable market.
Block’s gross profit derived from its Bitcoin business surged last quarter to $44 million on $2.4 billion in BTC sales. And its Bitcoin revenue is already more diversified than peers like Coinbase (NASDAQ:COIN), which remains reliant on trading activity. For example, most of Block’s Bitcoin gross profit comes from non-trading sources like the Cash App.
Of course, it remains to be seen whether the recent Bitcoin rally will endure. But if crypto enters a new bull market, Block’s positioning could drive significant outperformance.
The Bottom Line
Block is exiting the crypto winter in a position of strength. With growth remaining robust across its two core ecosystems, profitability potentially on the horizon in 2023, and crypto sentiment improving, now looks like an opportune time to take a position.
Block appears capable of generating 15%+ annual revenue growth this decade as digital transactions and wallets expand. While risks exist as always, the risk/reward tradeoff appears compelling at current valuations. I believe SQ stock has the potential to reach around $150 per share over the next five years if execution remains solid, representing sizable upside from today’s levels.
On the date of publication, Omor Ibne Ehsan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.