2023-11-03 09:15:00 ET
Summary
- Block reported a strong Q3 with gross profits growing 21%.
- The fintech plans to streamline operations, cut costs, and cap the employee base at 12,000 to maximize profits and improve product development.
- The stock is cheap based on the goal to boost the adjusted EBITDA to $2.4 billion in 2024.
Like a lot of fintechs, Block ( SQ ) has spent the last couple of years in purgatory. The company appears to have turned the corner with a strong initial guide for 2024 highlighting the fundamentally cheap stock still trading at pre-Covid levels. My investment thesis is ultra Bullish on the former Square now, with a focus on maximizing profits without losing a focus on product development.
Turnaround Quarter
Block reported a solid Q3'23 with revenues growing 24% to $5.6 billion and gross profits growing 21%. The company reported a quarter with most metrics showing impressive growth and blowing past estimates.
As discussed in prior research, the revenues aren't necessarily meaningful. The Q3 revenues were boosted by over 37% growth in Bitcoin revenue to $2.4 billion while this segment only delivered $45 million in gross profit due to mostly pass-through costs.
The key focus is really the gross profit level, where Block boosted the number to $1.9 billion, up 21% YoY. Though, the gross profits were mostly flat with Q2.
The fintech reported an adjusted EBITDA of $477 million, up substantially from the prior quarter. As with a lot of companies, the adjusted EBITDA is close to an adjusted profit figure with the costs excluding mostly non-cash stock-based compensation and amortization costs and one-time acquisition charges.
Block does have some normal expenses excluded via EBITDA such as depreciation costs, interest expenses, and income taxes.
Social Media Efficiency Path
The shocking part about the quarter was the guidance for 2024. Chairman Jack Dorsey has apparently decided to follow the social media efficiency path in 2024.
Mr. Dorsey sold his other company, Twitter, to Elon Musk for $44 billion, and he has since watched the new owner cut up to 80% of the workforce without any apparent disruption to the business. Around the same time, his nemesis at Meta Platforms ( META ) implemented a year of efficiency to strong results.
The former Facebook has seen the stock soar after the company reported 23% revenue growth in Q3, following a year of cutting employees and reducing costs. Similar to Block, Meta Platforms had plunged from the 2021 Covid peak, but Meta used the focus on efficiency and improved profits to push the stock back close to all-time highs.
Block announced incredible plans to cap the employee base at only 12,000. The fintech currently has 13,000 employees and is targeting to reach this goal by the end of 2024 with a plan of keeping the employee base capped at this level through years of growth.
The executive management team sees Block as sluggish now to implement new products due to a bloated structure. The goal is to streamline operations in the next year and improve product development while cutting costs.
Block plans to reach the rule of 40 via mid-teens gross profit growth and mid-20% operating income margins. This goal involves an incredible plan to boost the 2024 adjusted EBITDA target to $2.4 billion, up from a 2023 target of only $1.5 billion heading into the Q3 earnings report.
Including SBC, Block spent $1.7 billion last quarter on operating expenses. The company placing a cap on the employee count with a nearly 8% reduction from current levels while also further optimizing expenses presents the opportunity for a large cost reduction.
The big question is whether Block can achieve the plans for ~15% gross profit growth while cutting 1,000 employees from the employment rolls. Both Twitter and the former Facebook appear more functional after cutting employees, but every company is different.
Block jumped in after-hours trading, but the stock entered this quarterly report trading at a limited market cap of only $27 billion. Block was up 16% in after-hours trading to a value of $31 billion, but the company just boosted the adjusted EBITDA picture from $1.5 billion to suddenly $2.4 billion in 2024 via both a big boost to the 2023 target to nearly $1.7 billion now, but also due to nearly 50% growth in 2024.
Even with the initial rally, Block only trades at ~12x the 2024 adjusted EBITDA target. Investors need to question whether the company can actually achieve this big target boost in 2024.
If Jack Dorsey can implement this plan with COO and CFO Amrita Ahuja, the stock won't trade at $50 much longer, considering the goal of 15%+ adjusted gross profit growth usually leads to faster operating income growth. Block trading at 20x the EBITDA target is likely low, and investors can do the math on such a valuation.
Takeaway
The key investor takeaway is that Jack Dorsey appears set to take a page out of the recent social media efficiency playbook. If Block can achieve the big profit boost forecast for 2024, the stock is headed much higher. However, investors should be cautioned the focus is on progress, not perfection. Any large boost to profits in 2024 will make Block far more valuable whether or not the company achieves 50% adjusted EBITDA growth.
For further details see:
Block: Less Is Far More