![]() The company said at the end of April in already ahead 3 million active accounts, with most having users having a savings goal or using Round Ups to automatically save. Savings is one of Cash App’s newest innovations, launched in January of this year. Innovation and introducing new features and ways to monetize its large user base is a big growth driver. When it comes to growth drivers, Cash App it both the largest and fastest growing part of SQ, with Q1 seeing the ecosystem’s gross profit rise 49% to $931 million. Acknowledging it as a real cost, though, is a step in the right direction. However, it does want its teams to treat it as real expense when making decisions, and it thinks it will be able to drive efficiencies and leverage SBC over time. Now SQ’s SBC isn’t going to meaningfully shrink overnight, and the company said it still sees it as a good way to attract and retain talent. Last year, SBC was nearly 18% of gross profits and over 16% in Q1. The company has been often criticized for its high SBC and rightfully so. So the company has some work to get to that Rule of 40 level.įor its part, SQ has said it wants to treat SBC as an ongoing expense, which I think is commendable. That put its Rule of 40 numbers at 32% for EBITDA including stock comp and at 30% for adjusted operating margin. The company also made an acquisition, so on a combined company basis, gross profits grew 27%. Use adjusted operating profit margin of 3%, and it also falls below at 35%. Add SBC back in the equation (~$386 million EBITDA - ~$280 million SBC) and the profit margin is around 6%, and SQ falls below the Rule of 40 at 38%. ![]() However, the company has a lot of stock-based compensation excluded in that number. Meanwhile, annual recurring revenue or monthly recurring revenue (MRR) growth can be used instead of simple revenue growth, while for SQ I’d use gross profit growth given the nature of the business, as it is more akin to revenue.įor SQ, if we use Q1 gross profit growth (32%) and Adjusted EBITDA margins (21.5%) the company would be about 53.5%, well above 40%. EBITDA margins or adjusted operating margins can be used in lieu of GAAP profit margins. The Rule of 40 is simply that if you were to add a company’s revenue growth rate with its profit margin it should exceed 40%. Opportunities & RisksĪround the start of the year, SQ made a simple mission statement: “Block and each ecosystem must show a believable path to gross profit retention of over 100% and Rule of 40 on adjusted operating income.”įor those unfamiliar, the Rule of 40 is a popular metric used by SaaS investors and analysts to determine whether a company is growing efficiently, and just not growing for the sake of growing. ![]() The company also has two emerging ecosystems centered around bitcoin and music. Cash App has since gotten into offering services such as debit cards, instant rewards, saving, lending, tax preparation, stock brokerage account, and crypto services. The app is used primarily as a peer-to-peer payment network, which when linked to a debit account is free. The company’s Cash App, meanwhile, is an ecosystem of financial services to help users send receive, store, and invest money. This includes things such as vertical specific products like Square for Restaurants or Square for Retail, as well as solutions for online checkouts, invoices, appointments, fraud prevention, loyalty, payroll, and hardware solutions such as card readers and terminals. The square ecosystem now has more than 30 software and hardware products to help sellers. ![]() The company is best known for its Square ecosystem, which was originally set up to allow sellers to accept credit and debit card payments. SQ is a fintech company with businesses in several ecosystems. Block ( NYSE: SQ) has been putting up solid growth and its valuation has become more attractive, but questions remain about competition, the macroenvironment, and its Cash App business metrics. ![]()
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