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Is Block Undervalued?

Block Inc. (

SQ, Financial), formerly know as Square, is a leading fintech company with a mission to help expand access to the economy. Led by the charismatic Jack Dorsey, who has been called the “Elon Musk of fintech,” the company has seen tremendous growth over the past several years. From its initial public offering in 2015, the stock is up an incredible 892% and, prior to the recent correction, it was up an incredible 1,892%!

Is this a short-term correction? Could the stock be undervalued? To answer these questions, I will analyze the business model, management and then dive into my advanced valuation model to reveal the fair value for Block’s stock.

Why is the stock down?

Block missed revenue estimates massively for the third quarter of 2021, with $3.84 billion versus the $4.54 billion Wall Street was expecting. Quarterly revenue was down 17% from the three months ended in June 2021, mainly driven by a decline in bitcoin transactions.


New kid on the “block”

Block decided to change its name from Square, which didn’t over too well with Wall Street, and I personally felt it was unnecessary given the strength of its brand and lack of issues. However, the company stated this was to represent the growth of its business and its goals of being a financial and blockchain ecosystem.

The name change won’t affect the individual brand names the company owns. For example, Square is still the seller part of the business.

Business overview

The company is most famous for its small business point-of-sale terminals (Square) and the widely popular cash app, which make up the majority of Block’s revenue. However, the company aims to be the ultimate financial ecosystem for finance and blockchain technologies and, as a result, is moving into a variety of areas.

Cash App

The Cash App is a mobile application which acts as a one-stop financial ecosystem for its customers. The app offers many services, from peer-to-peer Payments to even stock and bitcoin transactions. The beauty of the application is the more a customer uses the various services, the more “Sticky” the platform becomes because of this feedback loop.


The company has also recently announced Cash App Pay, which allows the use of QR codes at the checkout. QR code payments are extremely popular in countries like China with Alipay, and thus may begin to grow in popularity in the Western world.

It is also expanding the cash app to new customers in the teen market. With authorization from a parent or guardian, a teenager can use the cash app for peer-to-peer payments, which helps them to save, get paid for chores and much more.

The beauty of this is all financial companies to get to know their customers as early as possible, because they can then grow with the person as they start to earn more income, thus this could be a future goldmine for Block.


The Seller part of Block’s business model consists of point-of-sale hardware (POS) and transaction-based revenue from sellers.

This was the original small business part of Block, but it has now expanded to larger businesses with its strategy of “Growing Up Market.” For example, in September 2021, the company announced a massive 10-year partnership with SoFi Stadium in order to be the exclusive point-of-sale and payments provider for the home to the Los Angeles Chargers and Los Angeles Rams.


Block’s plan is to offer a differentiated value proposition to larger sellers through rich data insights. For example, through the collection of transaction data, Block can inform the seller of real insights like what the top-selling items are, the businest purchasing times and more.

This will allow for optimization of staff, inventory and promotions. It’s hard to see why the company can’t roll this strategy out to more large stadiums in the future. In addition, large contract size and general stickiness of payment terminals should offer real consistency to Block’s revenue.

Financial breakdown

Block’s financials can be broken down into four segments:

  • Transaction-based revenue – 33%; this is mainly from the Square Seller Ecosystem, which takes a slice of every merchant transaction.
  • Subscription & Services Revenue – 18%; this includes Square’s premium and add-on services, such as Square Invoices and Square Invoices Plus for large businesses. In addition to Square Capital, which offers loans to businesses.
  • Hardware – 1%. Hardware includes Square’s famous point-of-sale terminals, but surprisingly this only makes up a sliver of its revenue at 1%. They even make a loss selling the terminals. For example, in the third quater, hardware revenue was $37 million, but the costs were $51 million. Thus, Block seems to have the strategy of practically giving away the terminals cheap in order to get the merchants on board as sellers. On balance, I think this makes complete sense given the hardware generates the transaction-based revenue of over $1.2 billion.
  • Bitcoin – 47%. Bitcoin is the elephant in the room when it comes to how Block makes mony, with a whopping 47% of total revenue the third quarter.


Watch out for bitcoin

Don’t let Block’s large bitcoin revenue deceive you. These numbers are “Bitcoin Payment Volume,” thus only the value of bitcoin transactions by its Cash App customers, but not how much revenue they make. This would be like including gross merchandise volume as revenue, which would make the revenue look much larger.

In fact, Block’s bitcoin seems to be a very low-margin business, perhaps making 1% to 2% per transaction, but this is just an estimate. The company’s gross margin is 24% based on this gross profit number, which is not great for a tech company. However, when we do the calculation excluding bitcoin, the gross profit jumps from 24% to 63%.

I think Block is currently using this “volume” number to show the potential of the transaction volume, but personally I find this quite deceiving for the average investor.

Bitcoin volume is down

From the table below of Block’s (then Square) quarterly financials, I have highlighted a few points. First, you can see bitcoin revenue (volume) is down a massive 47% compared to the prior quarter (red). This indicates the popularity in the asset may be decreasing or users are using alternative brokers, of which there are many to trade.

Transaction revenue is up 20% and hardware revenue is down 17%. Thus, net these bring the company’s net revenue only slightly above what it was in December 2020.


Thus, concentration of the low-margin bitcoin volume transactions to Square’s total revenue is a risk for the company and could add to more volatility in revenue estimates.

Lightning Network

Dorsey plans to drive bitcoin fees even lower by integrating the Cash App with the Lightning Network. This offers much lower fees, lower energy usage and faster transaction times compared to the traditional bitcoin network.

The transactions occur off the blockchain (off-chain) initially and then are consolidated and recorded on the main Bitcoin blockchain later.

Bitcoin bull

Dorsey also plans to create a decentralized network for bitcoin mining and has even set up a legal defense fund to help protect bitcoin developers from lawsuits.

Block still owns approximately 3,318 bitcoins on its balance sheet, which cost just $170 million, and has grown substantially in value since purchase.

Is the stock undervalued?

Below I have plugged all the latest financial details into my advanced valuation model, which uses a discounted cash flow to value the company.


My estimates include a conservative 20% growth rate on revenue for next year and then 22% for the next five years. This is conservative given Block has grown its revenue over the past nine months at 53% and at 42% in prior pre-pandemic years (2018 and 2019).

I have assumed revenue for the fourth quarter of 2021 will be in line with the prior quarter in order to give me an estimate of the fair value prior to the numbers being released.


For the operating margin, I have estimated it will grow from 5% to 17% over the next seven years, which is quite a long runway. In addition, I have included the outstanding options.


From my above discounted cash flow model, I am given a fair value of $136, which is currently above the current price of $123 per share. Thus, Block is undervalued by approximately 10%. Ideally I would like a margin of safety of around 20%, but this is a growth stock.

Monte Carlo simulation

In order to assess the value of Block’s stock under different conditions, I have completed a Monte Carlo simulation, which varies the valuation across a distribution of scenarios from bad to good. I have ranged the revenue growth estimates from a conservative 10% to 40%.


Investing with great founders

Dorsey, the founder and CEO of Block, has skin in the game and owns approximately 10% of the company, which is great to see. Investing with great founders has proven to be a great strategy by many successful hedge fund managers like Nick Sleep. However, it should be noted that in January 2022, a few insiders, such as the chief financial officer and Cash App lead, were selling small amounts of stock. This equated to around $300,000 to $600,000 based on their $8 million salary.

Final thoughts

Block is a fantastic company that is in a prime position to take advantage of the move from traditional banking to fintech wallets and distributed payment methods. The seller ecosystem and Square’s strategy to “Grow Up Market” offers many opportunities to expand its revenue to a large and more stable base over time.

Dorsey has a grand vision for the company and has made a big bet on bitcoin and the blockchain ecosystem. This means a bet on Block is a bet on the future of bitcoin and blockchain, of which there are smart people on both sides of the debate. The large revenue recorded from bitcoin transactions (which I established was really just payment volume) does add substantial volatility to revenue. As we saw, this volume has decreased by 47%, which is a major blow to the company’s top line and may indicate a future trend of crypto trading declining in popularity, which is a risk.

However, from the advanced valuation model I completed, the stock is approximately 10% undervalued. The mean valuation from various Monte Carlo simulations show the stock to be undervalued as well. Thus, this could be a great long-term investing opportunity if you believe in Dorsey’s mission. The real question is how the popularity of bitcoin transactions and cryptocurrency will play out in Block’s future.

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