Recent performance

Revenue growth at Block has been tremendous over the past few years. For example, in 2020, the firm managed to record revenues of around $9.5bn, over a 100% increase from the year before. In the first nine months of 2021, revenues totalled around $13.6bn. If the company can meet analysts’ estimates of $18bn for the year, this would represent a rise of nearly 100%. 

The firm has also managed to reach profitability, which distinguishes it from some other high-growth stocks. Profits are still extremely small though, as the firm continues to invest in itself.

It is also pursuing several opportunities that could help drive growth further. This includes a major focus on cryptocurrencies, which are seen by some as the future of finance. Block also recently announced that it was acquiring Afterpay in an all-share deal. This is a buy-now-pay-later platform, which will hopefully allow Block to capitalise on this massive-and-still-growing industry.

The risks

While the firm is growing at a great pace, there are many risks that could lead this stock to fall further. For one, Block is heavily reliant on Bitcoin. Indeed, in the third quarter, total revenue was $3.84bn, and nearly half of this came from Bitcoin — that is, the amount of Bitcoin that is sold to customers. Nonetheless, if the price of Bitcoin falls, this will decrease both its revenues and profits. Because the cryptocurrency is an extremely volatile investment, this increases the risks associated with Block stock.

I also have my doubts regarding the acquisition of Afterpay. Although it was an all-stock deal, Afterpay was still valued at $29bn. This is despite the fact that revenue in the last fiscal year was only $693m. As such, this places the company on a price-to-sales ratio of around 42, which is extremely large. This means that if Afterpay’s growth takes a hit, especially if the buy-now-pay-later industry falls out of favour, it could end up being an extremely costly acquisition.

Would I buy this growth stock?

Block evidently has an extremely large number of positives, and its current growth is outstanding. With a forward price-to-sales ratio of around four, the shares also seem very reasonably valued. Nonetheless, due to its heavy reliance on Bitcoin, it’s also a very risky investment. Therefore, although I am tempted, I am not planning on buying just yet, as I feel the decline could continue.

2021 has been a volatile yet successful year for cryptocurrencies with Bitcoin and Ethereum reaching new peaks of over $67,000 and almost $5,000 respectively in November.

Despite cryptocurrencies subsequently suffering from one of the largest market selloffs, I believe prices of these coins could recover and rise further in 2022. Ahead of this there are two stocks, Coinbase (NASDAQ:COIN) and Block (NYSE:SQ), which I will be investing in to get indirect exposure to crypto assets. Here, I assess which is a better investment.

Coinbase

As the largest cryptocurrency exchange, Coinbase has over 73 million users and offers exposure to over 120 different coins. This has made it one of the most attractive marketplaces for those wishing to broaden their crypto holding beyond mainstream Bitcoin and Ethereum, something current competitors are unable to match.

Despite shaky third-quarter earnings back in October, where the company missed its earnings and revenue estimates, I still see a lot of value to be gained from Coinbase as it benefits from first-player advantage and increasing numbers of newcomers to the crypto space thanks to trends such as NFTs.

With crypto being more widely used and accepted as a payment format, Coinbase shares could continue to rise as they expand into offering other services such as crypto wallets and different, new, tokens.  

However, as Coinbase currently generates nearly all its revenue from the buying and selling of crypto currency, the stock’s performance relies heavily on large coins like Bitcoin performing consistently strongly, which makes the stock somewhat volatile.

Block

Another way to play the crypto rally is through digital payments platform Block, formerly known as Square. The company, founded by former Twitter CEO Jack Dorsey, is one of the largest accepting Bitcoin payments. 

In 2021 just over half of its revenues were generated from Bitcoin trading whilst 40% came from digital and seller fees. I think this diversification makes it a strong stock to own as it is less volatile and provides exposure to other growing trends, namely digital payments.

Block’s recent name change could also be a move to join the metaverse trend as it copies peers such as Facebook, which changed its name a few months ago to Meta. With the metaverse and Web 3 incorporating crypto and blockchain technology, I see possibility for Block to increase its Bitcoin holdings further from its current $200 million.

The verdict

I think both Coinbase and Block provide strong exposure to cryptocurrencies and, with a recent crypto selloff, I think both stocks are relatively cheap now so provide a good entry point.

However, whilst Coinbase provides greater exposure to crypto markets and has key advantages such as first-mover status, the stock is too volatile for me.

Instead, I see Block as the better buy out of the two. Its diversified portfolio and operation across the fintech ecosystem beyond just crypto as well as the move to the metaverse could open up key new pathways for the company in coming years.

I own a number of stocks that operate in this space, including PayPal, Mastercard, and Visa. One FinTech stock I don’t own yet however, is Cathie Wood favourite Square (NYSE: SQ). Should I buy the stock for my portfolio? Let’s take a look at the investment case.

What does Square do? 

Square has developed innovative payment solutions for both businesses and individuals. For businesses, it offers a range of different solutions designed to improve efficiency. These include contactless card readers that help small retailers complete transactions, and point-of-sale solutions that help businesses manage sales, payments, records, and inventory.

For individuals, it offers the Cash App. This is essentially a digital wallet that allows people to send, spend, and save money in one app. This boasted more than 36m monthly active users at the end of 2020.

Square is also active in the cryptocurrency space. Over the last year, the company has spent over $200m on Bitcoin. Users of the Cash App in the US can also buy and sell crypto through the app.

What I like about Square stock

There are a number of things to like about Square, in my view. For starters, the business has carved out a real niche in the small business payments space. This is an area that’s traditionally been neglected by the banks.

Across the world, millions of businesses now use Square’s payment solutions and the general consensus is that the solutions are very good. On Trustpilot UK, for example, Square has a ‘great’ rating (4.2 out of five) with 84% of businesses saying Square offers an ‘excellent’ service.

It’s worth noting that JP Morgan CEO Jamie Dimon said he wishes his bank had done what Square has done in the small business space. He also said his bank should be very scared of FinTech players such Square.

Secondly, Square’s growth is very impressive. Between 2017 and 2020, Square grew its revenue from $3.3bn to $9.5bn. That represents annualised growth of 42%. By contrast, rival PayPal achieved annualised revenue growth of 18% over the time period.

Meanwhile, in the company’s latest Q1 results, it reported 44% revenue growth, excluding Bitcoin revenue. Including Bitcoin, revenue growth was 266%.

Risks

One concern for me however is that, unlike PayPal, Square doesn’t have a strong profitability track record. PayPal’s been profitable for years and has delivered consistent growth in net income in recent years. By contrast, Square hit positive net income for the first time in 2019. And last year, net income was down on the 2019 figure.

Another concern for me is the valuation. Currently, Square trades on a forward-looking P/E ratio of about 160. That’s a high valuation. By contrast, PayPal trades on an earnings multiple of about 64. At its current share price, Square has a market-cap of over $100bn.

Should I buy Square shares?

Overall, I think Square’s a very impressive company. However, I don’t see the stock as a ‘strong buy’ right now, simply because the valuation’s so high.

So, I’m going to keep Square on my watchlist for now. If we see another pullback in tech stocks in the near future, I may take another look at the stock.