Stock Analysis & Ideas

Block: On Track to Build an ‘Ecosystem of Ecosystems’

Last week, Block (SQ) held its investor day, a bit of a rare occurrence for the digital payments giant. The last such event took place 5 years ago, and many things have changed since.

In fact, referring to Block as a payments company might not suffice anymore, at least according to CEO Jack Dorsey. Dorsey has a bigger vision for Block, one which Deutsche Bank’s Bryan Keane highlights as an intention to build an “’ecosystem of ecosystems’ that will create a positive feedback loop as the business scales.”

And it is doing so by expanding its TAM (total addressable market). The company believes it holds just a 3% penetration rate in a market it values at ~$190 billion.

This is the market Cash App and Seller operate in, with both ecosystems providing “multiple vectors of growth,” according to Keane. Other initiatives such as music streaming service Tidal and Dorsey’s intention to advance various Bitcoin-related projects offer further room for growth. 

Much has already been made of the Cash App’s stellar success. Since its introduction 5 years ago, with a “compelling monetization engine driven by cross sell and inflows,” the P2P model has become a viral success and “developed a scaled consumer ecosystem.” In the US, SQ sees a ~$70 billion gross profit opportunity for Cash App.

But the success is not solely reserved for Cash. Built on a mix of hardware such as card readers and terminals along with software such as eComm APIs and Square Payroll in addition to “industry-specific tools” like Square for Retail, Restaurants and Appointments, SQ has developed into a “fully integrated commerce system.” And it will utilize all these tools and services to make further inroads into the “significant addressable market.” Not to mention, there’s also Afterpay, the buy now, pay later platform which SQ has acquired to provide the missing link between its Cash App and Square ecosystems.

All this focus on growth is set against the need to take care of margins, a balancing act Keane thinks the company has the nous to pull off.

“Ultimately, we see SQ altering its pace of investments depending on current economic and market conditions and given the current environment, we believe SQ will be prudently controlling spend to expand margins while still investing in long-term growth (we see potential margin upside near-term given high structural margins and fixed cost efficiency,” the analyst summed up.

In line with his optimistic approach, Keane gives SQ shares a Buy rating and his $155 price target suggests an impressive 104% potential upside for the coming year. (To watch Keane’s track record, click here)

It looks like most on the Street are on the same page here. Of the 37 analyst reviews on file, 6 stay on the sidelines, but all the rest are positive, making the consensus view a Strong Buy. The forecast calls for one-year gains of ~97%, considering the average price target clocks in at $149.12. (See Block stock forecast on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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