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Kathy Wood loves this stock so much so that she holds a 6% position in her Arc Innovation fund which represents the sixth largest stock in her fund a little over 3 months ago I uploaded a video on that particular stock arguing that the stock was cheap and that the sell off might be overdone and since that video the stock ried more than 80% in Just 2 months but despite the rally the stock is still down 75% from its all-time highs and to make matters worse the stock is already down more than 10% in 2024 which is not a great start for the new year at all if you're still wondering that stock is none other than block which is a fintech holding company that owns some of the most popular fintech brands today including square cash app and after pay block used to be the most popular growth stock but has now been beaten down so much that investors are asking is it time to follow kry Wood's footsteps and buy the dip well that is what I'll be answering in today's video more specifically I'll be covering blocks Q3 results Outlook and whether the stock is a good buy or not as always link to my block article in the description box below and with that out of the way let's take a look at blocks Q3 results first let's look at growth in Q3 blocks Revenue as a whole was $5.6 billion which is up 24% year over year and this happened to be a record high for the company and this this also beat analyst estimates by 190 million or 3.4% this strong performance was due to the growth of the square and cash app ecosystems however most of the growth was driven by the search in Bitcoin Revenue as we've seen by the recent rally in the price of Bitcoin in Q3 Bitcoin Revenue represented 43% of total revenue which was $2.4 billion in Q3 up by 37% year over year so given the fact that Bitcoin revenue is highly volatile unpredictable and low margin I prefer to analyze the company's financials without the Bitcoin component and so throughout this video you'll see metrics that include x Bitcoin which means Bitcoin Revenue has been excluded from the calculation of those metrics and the first one will be Revenue X Bitcoin which was $3.2 billion in Q3 which is up 16% year over year and notice how much lower that is compared to revenue including Bitcoin growth of 24% as you can see growth has been slowing down over the last few quarters and this is normal as the company grows over a larger base but despite the Slowdown Revenue X Bitcoin was at a record high as you can see here which reflects blocks unique value proposition and strong execution that said growth was driven by higher gross payment volume or gpv of $6.1 billion in Q3 which is up 10% you over a year and if you haven't realized Revenue X Bitcoin grew faster than gpv at 16% versus 10% for gpv this means that block is extracting more value for each dollar processed through its ecosystem and this can be seen by blocks improving monetization rates so here I have the definition of monetization rate and it is basically transaction Revenue Plus subscription and services Revenue divided by gpv and as you can see blocks overall monetization rate has been improving over the last few years in q1 of 2020 monetization rate was 4.1% and as of Q3 of 2023 it has increased to 5.25% and on a year-over-year basis the metric actually improveed 27 basis points year-over-year so this is great news because a higher monetization rate is essential for long-term shareholder value creation and that is what block has been able to demonstrate over the last few years moving on let's take a look at how each ecosystem is performing for cash app total revenue was $3.6 billion which is up 34% year over year again this included 2.4 billion of Bitcoin Revenue if we remove Bitcoin we get cash app Revenue X Bitcoin of $1.2 billion which is up 26% year over year as you can see growth is slowing down rapidly which I effect to stabilize in the high to Mid teens in 2024 regardless growth in cash app was due to $1 billion of cash app subscription and services Revenue which increased 29% year-over-year this was driven by higher monetization rates which I explained earlier an 11% increase year-over-year in the number of monthly transacting actives to 55 million a 100% increase quarter over quarter in the number of cash app pay monthly actives to over 2 million as well as inflows of $62 billion which is up 21% year over-ear so overall cash app growth remains robust which is great to see but I do expect that to slow down in future quarters turning to square the segment is growing slower than cash app since it's a much more mature business in Q3 Square Revenue was nearly $2 billion which is up 12% year over year and as you can see it is a record high for the segment as well which is just a testament to Square's Superior products and services all in all the cash app and square ecosystem continues to grow as fintech applications gain more adoption and Legacy Financial Services fall out of favor the number that caught my attention the most is the 55 million cash app users as of Q3 which is about 16% of the US population in other words while it seems that cash app already has a lot of users I think cash app still has a lot more room to grow as it still has a relatively low market share for instance fenmo has 63 million users and I think it's only a matter of time before cash app surpasses that number and as more users join cash app blocks ecosystem of ecosystems will enjoy powerful Network effects and this should drive strong growth and profitability for years to come let's now look at the company's profitability in Q3 gross profit was $1.9 billion which is up 21% new over-ear and this represents a 34% gross margin and if we remove Bitcoin we get a 58% margin X Bitcoin now I prefer to look at gross margin X Bitcoin and the reason why I like to look at margins without the Bitcoin component is because Bitcoin revenue is very low margin only 2% gross margin in fact so it doesn't really generate much shareholder value in my opinion besides excluding bit Bitcoin gives us a better view of how margins are actually trending that said Q3 gross margin X Bitcoin of 58% actually improve 200 basis points you over year demonstrating economies of skill within the block ecosystem which is what we like to see so here we can see gross profit by segment and for cash app gross profit was 984 million which grew 27% U over year representing a gross margin of 27% as well this doesn't look impressive at all but if we remove Bitcoin we can see that cash app is a very high margin business with a gross margin of 81% as of Q3 you can also see that cash app maintained this high gross margin the entire time which shows the durability of its business model and profitability as for square gross profit was 899 million in Q3 up by 15% year over year representing a gross margin of 45% and and as you can see squares gross margin remains stable as well which is great to see so all in all I like how margins are trending for both cash app and square moving on you can see the remaining profitability metric for block and this is the part that I don't like about blocks reporting so they just have so many non-gaap metrics and these are just so confusing and misleading and to show you what I mean I've gone ahead and wrote the definitions down here for you so you can pause the video and refer to it if you like and if you did you're probably thinking that one or two of these adjusted metrics are just completely unnecessary whatever it is I think it's better to focus on the Gap metrix and then use the adjusted metric to support or confirm your thesis for example we can see that Gap operating income was -10 million in Q3 which is an improvement from last year's 49 million and if we look at adjusted operating income we can see that it has improved year-over-year year as well so we can safely conclude that profitability is improving on the other hand Gap net income got worse year over year as you can see right here due to higher taxes and interest expense in 2023 as compared to 2022 but looking at adjusted net income and adjusted ibida we can see that both metrics improve year over-year so while Gap net income got worse year over-ear every other metric is actually getting better year over-year and if we look at them on a sequential basis as you can see right here we can see that they are all also improving quarter over quarter so this gives me confidence that block is on the right track to get profitability which is great to see that being said I believe Gap net income profitability will happen in 2024 as the company focuses on discipline growth and pursuing cost efficiencies in addition management plans to put an absolute cap on the number of employees to 12,000 which is down from 13,000 currently as such we can expect more layoffs in 2024 which should drive meaningful operating leverage for the company ultimately pushing the company towards profitability turning to the balance sheet block has $6.3 billion of cash and short-term Investments and $5.4 billion of total debt which puts its net cash position at about $0.9 billion and as you can see net cash has been improving over the last few quarters as the company focuses on cost savings and profitability and moving forward we should see net cash continue to build up from here that's because block is generating more and more cash in Q3 block produced a free cash flow of 454 million which is a free cash flow margin X Bitcoin of 14% as you can see this is probably the highest amount of cash generated in a single quarter and hopefully the company can increase this number over time regardless with robust free cash flow in place block will have more cash for expansion debt repayment as well as share Buybacks in fact block recently introduced a $1 billion buyback program which should minimize the dilutive impacts of stock-based compensation and it's also great to know that block initiated the buyback program on October 26 last year which was very close to the low of $40 a share that it I think the market was pleasantly surprised by the buyback program which is probably one of the many reasons that drove the stock price higher in terms of the Outlook management provided the following guidance and I've also included actual Q3 results for your reference in Q4 management expects gross profit of about $1.97 billion which is about a 19% growth year-over-year and this is lower than q3's growth of 21% as you can see right here so expect growth to slow down even more in addition Q4 adjusted operating income and adjusted ibida are expected to be lower than q3's figures at about $50 million and $440 million at their midpoints respectively so Gap profitability in Q4 is unlikely on the bright side management raised their full year 2023 profit guidance management now expects adjusted operating income of 215 million which was raised by 190 million and and adjusted ibida of 1.67 billion which was raised by 170 million and then in 2024 things are only going to get better with adjusted operating income expected to significantly improve to 875 million in 2024 for context that is about four times the figure in 2023 but more importantly management expects Gap operating profitability in 2024 which is great to hear s similarly 2024 adjusted ibida is expected to improve by nearly 50% U of year to $2.4 billion in other words profitability is expected to accelerate in 2024 additionally management believes that they will reach rule of 40 in 2026 with at least mid teens gross profit growth and a mid 20% adjusted operating income margin and for those who are unaware the rule of 40 is an investment principle which states that a software company's combined growth rate and profit margin should equal or exceed 40% given that block still has a long growth Runway with less than 5% penetrated against its total addressable Market of $200 billion and that management is taking proactive measures to cut costs and drive profitability I think the rule of 40 by 2026 is very much possible in short the Outlook given by management is very positive especially with the rule of 40 which lays out a clear path towards profitability which ultimately should drive long-term value for shareholders turning to valuation if we look at the price chart we can see that the stock has ried as much as 100% since its bottom in late October 3 months ago I uploaded a video on block arguing that the stock might be close to the bottom given that the stock is trading near its covid lows which makes it a very strong support and at the same time the stock was trading at depressed valuations making it a wonderful buying opportunity luckily my timing was right and the stock did bottom a few days after I uploaded my video mainly due to strong Q3 results that fueled the rally but the question is with the stock NOW down nearly 20% from its recent high of $80 is block stock still a good buy here let's take a look so based on an Eevee to gross profit multiple block still trades at Deep value territory the company currently has an e gross profit multiple of 5.3 times which is way below its peak of about 50 times and covid lows of about nine times despite being a much larger and profitable company today so despite the recent rally block stock still looks cheap from a historical standpoint I understand that the stock deserves a lower multiple given High interest rates High inflation and slowing growth but just look at this chart right here the fundamentals of the business as represented by the company's quarterly gross profit which is the orange line right here continues to improve with each passing quarter while the stock is back to where it was 5 years ago which is ridiculous in my opinion I just think there's a disconnect in fundamentals and share price which is why I think Shares are still attractive today in addition with the recent pullback blocks price action looks like an inverse Head and Shoulder which is a bullish reversal pattern so I think there's a good chance we see the stock go higher from here I also did a DCF model on block but I won't go over the details here but if you're interested you can read more about my DCF model in my blog article which I will link in the description box below I also show my Bull and Bear cases and other good stuff so you might want to check that out but what you're seeing here is my base case which has a price target of $14 per share and as you can see it is much higher than the current price of $64 a share so in short I believe block stock is still undervalued despite the recent rally and I think Block's turnaround story has only just begun which should present more upside for the stock for years to come to wrap up this video I think block is at an inflection point and I think this Q3 update was the Catalyst that could turn around the stock for good in the past 2 years investors hated block because of its lack of profitability but now management is focused on driving cost efficiencies and accelerating profitability which should unlock massive value for shareholders and they are doing this by placing a 12,000 employee cap and pursuing the rule of 40 as their long-term Financial Target and I believe the company still has a long growth Runway ahead as it builds the financial ecosystem of tomorrow through cash app and square furthermore block is on the bring of gap profitability which I think is the next major Catalyst for the stock that's it despite the Shar reversal in share price I do believe block stock is still undervalued but as for me I don't have a position in Block as I already have exposure to the company through my investment in marqueta which Powers the cash app and Square card so if you're interested you can watch my marqueta analysis right here otherwise that's all that I have for you today if you enjoyed this video don't forget to hit like And subscribe to my channel for more investment content like this as always thank you for watching this video I appreciate appreciate you and I hope you have an amazing day see you guys on the next video
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