Crypto business is a problem for Block Inc, this investor says

The stock may be down plenty from its recent highs but that doesn’t make Block Inc (Block Inc Stock Quote, Charts, News, Analysts, Financials NYSE:SQ) a buying opportunity. So says portfolio manager Brett Girard of Liberty International Investment Management, who sees Block’s heavy dependence on the cryptocurrency business as a red flag for potential investors.

The $75.5-billion market cap Block Inc changed its name from Square to Block in December in an effort to better reflect the fintech company’s focus beyond its set of commerce solutions for businesses that make up its Square segment and incorporating among other things the role cryptocurrencies and the blockchain now play in Block’s set of financial tools.

“The change to Block acknowledges the company’s growth,” said the company in a December 1 press release to announce the name change. “Since its start in 2009, the company has added Cash App, TIDAL, and TBD54566975 as businesses, and the name change creates room for further growth. Block is an overarching ecosystem of many businesses united by their purpose of economic empowerment, and serves many people — individuals, artists, fans, developers, and sellers.”

Then in January, Block confirmed it would be adding bitcoin mining to its string of businesses, saying it aims with all its products to provide access to financial tools, democratizing finance, as it were. In this case, the company’s aim will involve making its own ASIC (application-specific integrated circuit) mining hardware.

“We want to make mining more distributed and efficient in every way, from buying to set up to maintenance to mining,” said Thomas Templeton, Block general manager for hardware, in a January 13 tweet. “We’re interested because mining goes far beyond creating a new bitcoin. We see it as a long-term need for a future that is fully decentralized and permissionless.”

But those ties to crypto, where Block currently makes a big chunk of its revenue selling bitcoin to customers through its Cash App business, make it susceptible to the volatility of cryptocurrencies, says Girard.

“Block and Square are the same company run in part by Jack Dorsey who also runs Twitter,” said Girard, speaking on BNN Bloomberg on Friday. “This is a company that did very well through the beginning parts of the pandemic. It was a $50 stock that shot up almost to $300. It’s come back down now — it dropped below $100 and now we’re sort of in the $130 range.”

“I think the challenge with Block is if you dig into where their revenue sources are really coming from it’s largely bitcoin and cryptocurrency trading. And we’ve seen bitcoin back up over $40,000 but it’s not at the $70,000 that it was before. And so, that makes it a company like Block, which is a competitor to a name like Visa, a bit more challenging of a name to invest in,” he said.

Block’s revenue is certainly tied in a big way to bitcoin. The Cash App segment of its operations involves stock and bitcoin investment services where the company charges a fee for customers purchasing bitcoin through its platform, and for the 2021 year, Block recorded revenue of $17.661 billion, with Cash App’s business bringing in $12.315 billion of that amount compared to $5.193 billion from its Square segment which covers the company’s managed payment hardware and services for sellers. Of the $12.315 billion for Cash App, a full $10.013 billion was recorded as Bitcoin Revenue, which was more than double 2020’s number at $4.572 billion. 

On earnings, Block posted gross profit of $4.419 billion last year, with $2.071 billion coming from Cash App, meaning that Block generated a little under half of its gross profit from its bitcoin business.

Last year was a huge one for the cryptocurrency industry, with the price of bitcoin rising from the $15,000 mark as of October 2020 to over $80,000 by November of 2021. That led to a lot of success for all business related to crypto, from miners to coin exchanges and fintech companies like Block. But the good times of 2021 may be hard to repeat, and Block cautioned as much in its fourth quarter 2021 report, saying investors should expect volatility.

“In future quarters, bitcoin revenue and gross profit may fluctuate as a result of changes in customer demand or the market price of bitcoin, particularly as we lap strong growth rates on a year-over-year basis in the first quarter of 2021,” Block said in its fourth quarter letter to shareholders.

For Girard, the wiser play within the fintech space, which has seen companies across the board take major hits in recent months, would be the more established players like Visa or MasterCard.

“If I’m looking in the payment space, and I’m saying, what names do I want to go after. It’s Visa and MasterCard and the list probably stops there,” Girard said. “I would exclude Block, I would exclude PayPal. The [stock] prices have come down and there’s good reason why that is. So, I would stick to the majors in this case.”