Prediction: The Block Sell-Off Is a Buying Opportunity

Block (NYSE: XYZ) got blocked by a number of potential investors after the fintech company's first-quarter earnings disappointed the market. The stock is now trading down more than 46% on the year as of this writing, following its recent sell-off.

While best known for its original Square business, it was Block's Cash App business that led to the sell-off. Square was originally developed to allow merchants to accept credit card payments from their phones and tablets and has since become a platform that lets retailers better manage their entire operation. Cash App is a peer-to-peer payment platform that sprang out of the business that was launched in 2013 under the name Square Cash.

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Cash App growth begins to stall

Cash App has since grown to be an important part of Block's business, offering additional services such as savings accounts, brokerage accounts, crypto services, debit cards, lending, and tax preparation, all in an attempt to grow its user base and better monetize it. However, despite its continued push into lending and other financial services, the company saw a material deceleration in inflows while active user growth stalled.

During the quarter, Cash App's gross profits grew 10% to $1.38 billion, but that was below the $1.42 billion StreetAccount consensus and a big deceleration from the 16% growth it saw in Q4. The company prefers to focus on gross profits instead of revenue because its Bitcoin trading business can impact revenue.

Inflows increased just 8% to $76.9 billion, as this number also continued to decelerate. Monthly active users (MAUs), meanwhile, were flat at 57 million. MAUs have been stuck at 57 million for the past five quarters.

Data source: Block investor letter.

Cash App was impacted by the shift in consumer spending behavior during the tax refund season. The company said that while non-discretionary spending has held up, discretionary spending is being impacted.

Despite the difficult environment, it sees several potential growth drivers for later this year. This includes the integration of high-margin Afterpay features into Cash App, which it introduced in the U.S. in March. It also said it launched its largest-ever national brand campaign in March that will run in its top 15 markets.

Perhaps most importantly, though, it recently won approval from the FDIC to offer consumer loans nationwide through Cash App Borrow. It said this will allow it to expand loan availability and improve loan economics by being able to originate and service the loans itself.

Turning to Square, its gross payment volume (GPV), which is the dollar value of the transactions that get processed through its payment network, increased 7% in the quarter. U.S. GPV rose 6%, while international GPV climbed 15%, or 21% in constant currency. The company credited product innovation as a key growth driver. It is looking for GPV to accelerate to high single digits in Q2 after a 9.6% jump in GPV in April.

Overall, Block's gross profits rose by 9% to $2.29 billion, while adjusted EPS climbed 19% to $0.56.

Looking ahead, the company decided to take a more cautious stance with guidance due to macroenvironment uncertainty. It now expects gross profits to grow by 12% for 2025, with growth accelerating in the second half. It is looking for 9.5% growth in Q2, followed by low-double-digit growth in Q3, and mid-teens growth in Q4. Previously, it was expecting at least 15% gross profit growth for the year.

Image source: Getty Images.

Should investors buy the dip?

It's easy to see why investors were disappointed with Block's report: The company saw decelerating growth and it lowered its full-year guidance. The company's inability to grow its Cash App user base is of particular concern.

The sell-off has left the stock trading at a forward price-to-earnings (P/E) ratio of 9 times analysts' earnings estimates for 2025. While some estimates may need to be adjusted a bit lower, that's still a very inexpensive valuation.

Meanwhile, the combination of a big marketing campaign, AfterPay, and the approval to offer loans nationwide could help reinvigorate growth later this year and into the future.

In my view, the combination of low expectations and a depressed valuation makes Block an intriguing investment opportunity. As such, my prediction is that the sell-off will represent a good buying opportunity over the next year.

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Geoffrey Seiler has positions in Block. The Motley Fool has positions in and recommends Bitcoin and Block. The Motley Fool has a disclosure policy.