Shares of Block (NYSE: SQ) haven't panned out for investors in recent years. The financial services platform was a Wall Street darling during the pandemic's height, but it's been a huge disappointment since.
As of this writing, this fintech stock trades 78% below its all-time high. However, there are numerous reasons to still be bullish on the business, as it has many favorable qualities.
But before you buy shares while they're down, you need to pay attention to a specific risk.
Fintech powerhouse with a twist
It's easy to appreciate the market position that Block has been able to establish over the past several years. The business has turned into a financial services and payments powerhouse thanks to the success of two key operating segments.
There's Square, which also used to be the company's name. It focuses on serving merchants with point-of-sale hardware devices, working capital loans, and various software tools. Gross profit was up 15% in the second quarter year over year, and Square handled $58.4 billion in gross payment volume during the quarter.
Then there's Cash App, the quickly ascending personal finance app that is becoming a banking substitute for consumers. This segment has typically grown faster than Square, with gross profit rising 23% last quarter. Cash App currently has 57 million monthly active users.
However, Block has a new strategic focus that is more apparent. The company's founder and CEO, Jack Dorsey, publicly displayed his belief in Bitcoin (CRYPTO: BTC), the world's oldest and most valuable cryptocurrency. "I don't think there is anything more important in my lifetime to work on," he said in 2021.
Despite only using less than 3% of company resources on Bitcoin projects, there are many initiatives going on. Cash App started facilitating the buying and selling of Bitcoin as far back as 2018. In Q2, this service only accounted for 3% of Block's total gross profit.
But through lesser-known divisions, like TBD and Spiral, Block is working on a hardware wallet and mining chips. The business wants to make it easier to use Bitcoin, whether it be for remittances or everyday activities. Block is taking the concept of mixing financial services and technology to heart.
On the one hand, if Bitcoin really takes off in terms of adoption, this strategy could position Block as a leader in the space. And it could result in major user and revenue growth over the long term. The company would also benefit, because it had $573 million worth of Bitcoin on the balance sheet (as of March 31).
On the other hand, skeptics will view this as a big distraction, and an even bigger waste of valuable financial resources, talent, and attention. They'll also argue that Bitcoin is a useless or worthless technology that resembles a solution trying to find a problem.
Investor perspective
Nonetheless, this is the reality of Block's operations today. Any prospective investor must know this before putting any money to work.
This huge focus on Bitcoin can certainly be viewed as a risk because the ultimate outcome is far from being predictable. There's a wide range of potential outcomes.
To be clear, I'm in the camp that is actually bullish on Bitcoin. Owning the digital asset directly or through a spot ETF product may make sense. However, for investors who aren't ready to dive headfirst into the waters, buying shares in a successful fintech enterprise like Block can provide safer, but indirect, exposure to Bitcoin.
At this point, though, I believe that if investors aren't optimistic about Bitcoin over the long term, they shouldn't add Block to their portfolios.
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin and Block. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
