Block: Bitcoin Set to Become a Bigger Factor

When Square changed its name to Block (SQ) toward the end of last year, few doubted the intentions behind the name change.

CEO Jack Dorsey has long been a big bitcoin proponent and since late 2017, the company has allowed users to buy, sell, and hold bitcoin. Block views bitcoin as a catalyst for broader financial inclusion, which it hopes to stimulate through increasing awareness and the development of commerce infrastructure.

As RBC’s Daniel Perlin says, “Block has positioned itself as a leader and a business, not just with exposure to the asset, but continually embedding bitcoin as a solution within its products.” So, the name change obviously signaled a “greater focus on developing the bitcoin ecosystem.”

And that the company is certainly doing. More than just allowing for the buying and selling of bitcoin, the company is ploughing ahead with a set of major “bitcoin-focused initiatives.” These include a hardware wallet, personal bitcoin mining, and a “decentralized on/off-ramp” from fiat to bitcoin.

Including majority Block-owned music streaming service TIDAL, these “four emerging initiatives” are anticipated to factor for ~$140 million in non-GAAP operating expenses, amounting to 2%-3% of FY22’s investment plans. 

Perlin sees this as a “reasonable level of investment given the long-term opportunity.” And with the focus on expanding the bitcoin ecosystem, Perlin says it is obvious Block’s ambitions amount to “much more” than just being a broker.

While bitcoin’s revenue contribution is significant - representing around 57% of FY21’s total revenues - at around ~5% of FY21’s total gross profit, the “corresponding” gross profit contribution is still rather small.

As such, the 5-star analyst believes the “long-term implications” of Block’s plan suggest two major points: “1) its intentions to build key infrastructure in order to enable bitcoin-based commerce on its platform and 2) that the path to expanding gross profit margins will play prominently in the long-term viability of its bitcoin strategy.”

All in all, Perlin reiterated an Outperform (i.e., Buy) rating, backed by a $147 price target. This leaves room for growth of ~19% over the coming months. (To watch Perlin’s track record, click here)

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