A growth stock to play the bitcoin and cryptocurrency theme

30th March 2022 08:21

by Rodney Hobson from interactive investor

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Don't bother with these shares if you're after income, but growth investors with an appetite for risk and those who love bitcoin and cryptocurrencies might be interested.

It has been a bumpy ride for shareholders in digital payments system provider Block (NYSE:SQ) as the shares lost more than half their value since last August. Yet this company, formally known as Square, has remained a consistently firm favourite with interactive investor customers and with technology investment trusts. With the shares appearing to have bottomed out, this could be a good time to consider a buy.

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The California-based company provides services to merchants, not just for credit card readers but for other financial transactions and marketing. It has also launched Cash App, which handles payments from one individual to another and allows them to make bank deposits, invest in shares and buy Bitcoins. Although it has operations in Canada, Japan and the UK, the overwhelming majority of its business is conducted within the United States.

The rebranding from Square to Block that occurred on 1 December has cause some confusion among investors, with the shares dropping by a third in the following weeks. The name change was to reflect a move to develop the blockchain technology associated with cryptocurrencies which offers enormous scope for the company to embark on dramatic growth.

However, the Square brand is being retained for the point-of-sale technology, highlighting a split that could potentially leave the company distracted between two different businesses.

Source: interactive investor. Past performance is not a guide to future performance.

Another challenge for management is to integrate recent Australian acquisition Afterpay, which is taking on the well-established credit card companies by arranging buy now, pay later purchases. This is a comparatively underdeveloped market that offers considerable scope for growth but it is also a competitive market and Afterpay is still in the start-up phase.

Latest figures, for the September to December quarter, largely preceded these changes. Revenue and earnings beat analysts’ forecasts, with gross profit up 47% to $1.18 billion and net revenue, boosted by Cash App transactions for Bitcoin, up 62% to $4.42 billion.

Cash App had 44 million active monthly users at the end of December, up from 40 million last June. Gross profits from the app rose 37% year-on-year to $518 million, with each active user chipping in $47 a month, 13% more than in 2020.

Gross payments from merchant customers rose 92% to $46.3 billion.

The original Square was floated at $9 in November 2015 and seemed to be heading nowhere fast until, like many tech stocks that cater for electronic shopping in some form or another, the shares really took off after the March 2020 stock market crash at the start of the pandemic. From $38 then they soared to $270 in less than 12 months before reality eventually set in and investors accepted the consequences of irrational exuberance.

At $146 now they are more sensibly priced and have found a floor, for the time being at least, just below $100. However, there is unlikely to be a dividend for some time as profits are ploughed back into growing the business. Meanwhile, the rating is still extremely demanding at around 400 times earnings.

Much depends on whether Block can become a truly global brand. If it can, then that rating will be justified. On the downside, Block may find that it is too heavily dependent on the fortunes of small businesses that form the bulk of its clientele. This is a sector that is to a large extent still struggling to recover from pandemic shutdowns and will be hit once again as interest rates rise.

Hobson’s choice: At current levels the stock looks worth buying, but only on a speculative basis and only for those who look for capital gains rather than income. Be prepared to cut your losses if the shares slide below $100 again or to take profits above $200.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.

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