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Block Inc's share price could rise on 'Rule of 40'

ASX-listed fintech giant Block hopes to achieve sustainable profitability by satisfying the 'Rule of 40' for software platforms.

Source: Bloomberg

The share price of ASX-listed fintech giant Block Inc (ASX: SQ2) could receive a boost from efforts to trim expenses and shore up cash flow, in a bid to satisfy the 'Rule of 40' for software companies by 2026.

The company could also benefit from plans to expand its digital payments ecosystem to include the use of Bitcoin for e-commerce.

Block beats expectations in 2023

Founded in 2009 by ex-Twitter CEO Jack Dorsey, SQ2 originally went by the name Square and focused on the development of fintech solutions for small and medium-sized enterprises.

The company's flagship product was a credit card payment system that enabled small businesses to use smart devices for a range of functions, including banking and finance as well as bookings, inventory, payroll and e-commerce.

Square rebranded itself as Block Inc. in December 2021, and has since expanded its portfolio of businesses to include buy-now pay-later platform Afterpay, P2P platform CashApp, web host provider Weebly, and subscription music streaming service Tidal.

Despite the fintech sector weathering harsh conditions during the recent Covid pandemic, SQ2 managed to perform ahead of expectations by the end of 2023.

Earnings for the period ended 30 September were 55 cents per share on an adjusted basis, for a rise of 31% compared to the same period last year, and well ahead of analyst projections of 47 cents a share.

Net revenue lifted 24% to $5.62 billion, as compared to an analysts forecast of $5.42 billion. Gross profit leapt 21% to $1.9 billion, just ahead of the estimate of $1.895 billion.

A memo from ECP analysts indicates that SQ2's Q323 results sent positive messages to investors on cost discipline and internal productivity. According to ECP, this messaging helped SQ2 to outperform expectations in December.

SQ2's share price has retreated considerably since the start of the year, declining over 11% year-to-date.

In spite of this decline, CMC Invest indicates that all three analysts covering SQ2 are upbeat about the company, rating it a strong buy.

Analysts are particularly upbeat about SQ2's plans to reach the 'rule of 40' within two years – a reference to the principle that a software company can achieve sustainable profits once their combined revenue growth rate and profit margin breach the 40% threshold.

Bitcoin adoption could drive popularity

In addition to its plans for improved profitability, SQ2's fortunes could also receive a boost from efforts to improve the quality of its fintech capabilities, including the introduction of cryptocurrency functionality for e-commerce.

SQ2's Square Cash App has evolved into a digital payments ecosystem that caters to the needs of both vendors and consumers, offering a broad range of services including peer-to-peer money transfers.

This functionality could take a major step forward with SQ2's efforts to create the infrastructure for Bitcoin storage and transfer solutions.

Macquarie analyst Paul Golding notes that SQ2's Bitcoin solutions provide consumers with a higher level of independence and security than other online options.

'The product and platforms aim to democratize and simplify access to self custody solutions for crypto assets, allowing users to own and manage their Bitcoin easily and securely, without relying on online custodians and hot wallets that can be compromised by bad actors,' Golding said in a report.

SQ2 announced in January that its Bitcoin wallet is now able to Cash App users in 95 countries. The incorporation of Bitcoin functionality into the platform could help boost its popularity amongst cryptocurrency enthusiasts.

'We think, if marketed broadly, the Bitkey platform could drive greater use of Cash App generally, but especially for crypto users,' Golding said.

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