Block (NYSE:SQ) is a true fintech disruptor that we have traded several times. The stock has been absolutely decimated in the last few months along with so many other innovative tech names. The stock has fallen a good 70% plus from peak to trough. That said, even with the horrific action in the stock market, the company is still growing sharply and is moving more toward being profitable in a sustainable manner. It is our opinion that shares actually became reasonably valued when they dipped under $100, but at and under $80, we think there is big opportunity to own this disruptive name. While we have gotten more bullish as the stock has dipped under $100, both the company's just reported numbers, as well as the just announced news of being integrated with Apple's touch to pay capabilities, we really like a buy here. Keep in mind that a massive short interest may lead to a squeeze in any market that rallies, as well as any good news for the company as well. As traders, we love coming back in under $100, especially on the recent news and still positive earnings.
Just today we learned that Block announced that it is working with Apple to enable Tap to Pay on iPhone. This is Apple’s contactless payment feature and it will now be available within the Square Point of Sale app. This is huge for small businesses and consumers alike as it reduces the need for separate transactions, entering credit card info, and is even more convenient than tapping a card or inserting a chip. This will speed up transactions which will allow businesses to process more transactions per hour vs. traditional methods. It is a win. Right now the technology is in beta, and small businesses can sign up to test the technology with its Early Access program. This program is open, with the hopes of gathering data on the functionality and adoption of the tech, with a rollout expected later in 2022 officially. This is a big win. This company is a disruptor, and now it is opening up the ability for businesses to speed up the checkout process. While it may seem silly to some, the fact is that speed matters, especially when a line of customers are waiting. This development is bullish. While the company continues to grow and impress, the pace of growth has been slowing a bit, as evidenced in the Q1 report. While still a mostly strong report, we like that anything that can be done to boost speed and adoption of Block's technology going forward.
While the company has made a great deal to be integrated with Apple, the company did fall short of estimates in its recently reported quarter. Keep in mind that revenues have really taken off since cryptocurrency, such as Bitcoin (BTC-USD), buying and selling was introduced to the platform a few quarters ago, but the stock has become linked to a large degree to the price of Bitcoin. That is both good and bad. Right now it's really bad because Bitcoin has been crushed. In the just announced quarter, net revenue was $3.96 billion, down 22% year-over-year. This was a miss versus consensus. But a lot of this horrible action was driven by the trash action in Bitcoin. Excluding Bitcoin transactions, total net revenue in Q1 was $2.23 billion, up 44% year-over-year.
As you can see, this remains very impressive growth, even if it's not as explosive as it had been in the past. Still growing so nicely. However, with Bitcoin you can see how important it has been to the growth of the company in the last year plus, and in this case, it has weighed terribly because Bitcoin prices have fallen so much. Overall however, all lines of business are performing well. Overall, gross profit was $1.29 billion, up 34% year-over-year, and this is strong. But it was driven by strong transaction revenue.
Revenue from transactions was $1.23 billion rising 28% year-over-year, while gross profit was $514 million, up 19% from the year ago quarter. This is strong, contributing to the solid headline numbers, even if they missed. The big problem is that these increases are not as large as in the past, though, the market effectively priced in this slowing growth after shaving the stock 70% plus.
If you are an investor here, then volumes are a key metric to watch. Volumes were better than expected, surging from a year ago. Block processed $43.5 billion in GPV, up 31% year-over-year. Transaction-based gross profit as a percentage of GPV was 1.18%, down 12 basis points year-over-year but remains strong.
We also saw solid strength once again in subscription and services-based revenue. This revenue here rose to $960 million while gross profit was $764 million, up 72% year-over-year, and up over 20% from the sequential quarter. This was a strong result.
From the "Corporate and other revenue" line there was $55 million generated mostly from TIDAL. What about the flagship products in both Cash App and Bitcoin which are huge revenue sources?
Cash App has been a winner for Block. Cash App generated $2.46 billion of revenue while delivering $624 million of gross profit. Bitcoin was a large part of this.
It's worth noting that the price of Bitcoin was a bit weak in Q1. While the volatility in pricing helps with trading revenue, the company has a lot of Bitcoin on its balance sheet. The company is highly invested in Bitcoin. So with bitcoin falling, shares have been punished. In the shareholder letter, management states:
2021, we invested $50 million and $170 million, respectively, in bitcoin. As an indefinite-lived intangible asset, bitcoin is subject to impairment losses if the fair value of bitcoin decreases below the carrying value during the assessed period. In the first quarter of 2022, we did not recognize a bitcoin impairment loss. As of March 31, 2022, the fair value of our investment in bitcoin was $366 million based on observable market prices, which is $217 million greater than the carrying value of the investment.
Keep in mind that retention remains positive and active customers are driving transaction revenues higher.
Revenue is in growth mode and the company is generally earnings-positive. However, operating expenses rose this quarter, and they outpaced the revenue gains which is not good for growth long-term. Operating expenses were $1.52 billion, rising a massive 70% year-over-year. Net loss was actually $204 million, and that is a bigger loss than we would like to see. However, excluding losses from investments and equity revaluations, EPS was a gain of $0.18. It is good to be in positive earnings territory, but can the company stay there?
What can we expect as we look ahead? The business trends highlighted in the shareholder letter are revealing. While they are strong for the most part, here are the main highlights:
For the month of April, in aggregate, Square GPV is expected to be up 29% year over year. On a three-year CAGR basis, GPV growth is expected to be 24% in April, compared to 22% growth in the first quarter. In April, we expect Cash App gross profit, excluding Afterpay, to grow on a year-over-year and three-year CAGR basis, driven by growth in monthly transacting actives, engagement across our ecosystem, and inflows into Cash App...For the second quarter of 2022, we expect non-GAAP operating expenses across product development, sales and marketing, general and administrative expenses, and transaction, loan and consumer receivables losses, in aggregate, to increase by approximately $245 million compared to the first quarter of 2022. Excluding contributions from Afterpay, we expect to increase overall non-GAAP operating expenses by approximately $180 million compared to the first quarter.
This update is mostly positive, though increases in operational expenses are of course a concern. As we look ahead to the year we expect $0.50-$2.00 in EPS which puts the stock at a still pricey but much more reasonable 68X FWD EPS at the midpoint of this expectation. But on a price to sales metric, a good measure of growth tech valuation, we are at a much more reasonable 2.35X. We think the stock can come down more, but is a buy.
The company continues to innovate and grow revenues. We hate to see operating expenses grow so much, but earnings remain positive. The valuation is stretched but we think this can improve if crypto prices improve, while operationally the company continues to execute. All things considered, with the moves the company is making, we think you should be a buyer here.
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