Financial-technology stock Block (SQ -3.24%) has completely fallen out of favor with the market. In 2021 (back when its name was still Square), its price surpassed $281 per share. As of this writing, it’s down more than 60% from that price as investors question the company’s future growth potential.
If you’re wondering about Block’s future ability to outperform the market average, consider this: In 2021, just 3.3% of the company’s overall revenue came from outside of the U.S. This means that if Block is going to remain a growth company, it will need to see progress in international markets. And investors are starting to see a glimmer of hope in this area.
A closer look at Block’s revenue
At the outset, it’s important to understand that not all of Block’s $17.7 billion in 2021 revenue is created equal. For example, revenue generated from selling hardware devices and processing Bitcoin transactions looks like a waste of time on the surface.
To be clear, it literally costs Block more to make hardware devices than what it sells them for — this is called negative gross profit margin. Here are the concrete numbers: In 2021, Block spent $221 million on hardware. It only generated revenue of $146 million. In other words, it cost Block about $75 million just to get its hardware in customers’ hands.
Similarly, Block isn’t interested in making money processing Bitcoin transactions. In fact, this has just a 2% gross margin. And yet, this is the majority of Block’s business. In 2021, nearly 57% of revenue came from Bitcoin.
Block is forthcoming on the logic behind this strategy. In its annual report, management writes, “Hardware is sold primarily as a means to grow our transaction-based revenue and, as a result, generating positive gross margins from hardware sales is not the primary goal of the hardware business.”
Regarding Bitcoin, Block’s stated goal is just to facilitate access for its customers, not make money.
All of this said, Block’s transaction-based revenue and subscription-and-services revenue is a lucrative business proposition. These revenue streams come with 43% and 82% gross margins, respectively.
If you want to win customers for the high-margin opportunities, your best bet is to offer the broadest range of products and services. Therefore, Block may make little to no money for some things. But it’s nevertheless important to offer these to win the higher-margin business opportunities.
This playbook for Block will likely apply in international markets as it has in the U.S.
Block’s investment overseas
As already mentioned, only 3% of Block’s revenue is generated in international markets. But the company has already been investing overseas. Specifically, merchants already sell using Block’s services in Canada, Japan, Australia, the U.K., Ireland, France, and Spain, according to its 2021 annual report.
For existing merchants, Block has likely already lost money selling them hardware devices — that’s the investment part. Now Block gets to reap the benefits of generating higher-margin revenue for transactions and ongoing services. And there’s evidence this is precisely what’s happening. While international revenue is just 3% of total revenue, international markets accounted for 9% of gross profit for Block’s seller segment in the fourth quarter of 2021.
To contextualize this further, Block generated $181 million in international revenue in Q4. Q4 international gross profit was $62 million. This 34% gross margin for international revenue is actually better than its overall gross margin of 25%.
Remember, Block’s revenue mix is concentrated around Bitcoin, which is low margin. This is why the overall gross margin looks low. But that’s the point I’m making with Block’s international business: Hardware is a negative-margin business. The 34% gross margin suggests that Block’s international business is quickly scaling away from hardware and toward transactions and services, which is better for shareholders.
Over the long term, stocks tend to go up as their profits rise. Many factors contribute to a business’s overall profitability. But one of these factors is gross profit. And Block’s gross profits are growing quickly internationally, which could help catalyze future market-beating gains.
Visualizing Block’s international potential
According to The World Bank, global gross domestic product (GDP) in 2020 was $84.75 trillion. The U.S. comprised roughly a quarter of this. However, the other countries that Block already does business in collectively comprise nearly 20% of global GDP. In other words, if Block can scale in these international markets as it has in the U.S., it could nearly double its opportunity.
There are other things that could catalyze Block’s growth. And there are certainly some risks to the business that we haven’t examined here. But if you were wondering how Block could sustain growth for the long term, I think you’ll agree that international markets remain a largely untapped, outsized opportunity.