Should You Buy and Hold Block Stock for 20 Years? 1 Crucial Factor You Can’t Ignore. | The Motley Fool

Block (XYZ -3.84%) was once a high-flying stock. In the five years leading up to their peak in August 2021, shares were up an astonishing 2,430%. Growth was fantastic, and the market was warming up to this innovative financial services business.

It’s been a disappointing story since that peak. As of July 14, this fintech stock traded 76% below the record, with a 21% decline just this year. The growth has slowed, to be sure, but Block’s profits have been soaring. And the stock now trades at a compelling forward price-to-earnings ratio of 24.7.

Should you buy shares right now and hold them for 20 years? The answer depends on one crucial factor that’s becoming more important to Block’s business.

Two powerful ecosystems

Investors should first understand that this company owns and operates two powerful ecosystems. Square serves small- and medium-size merchants, giving them various commerce tools to help them manage and grow their operations. There are point-of-sale solutions, as well tools to help manage inventory, payroll, loyalty programs, and many other things.

In the first quarter (ended March 31), Square posted year-over-year 9% growth in gross profit. And it certainly benefits from switching costs, as these customers become locked in once they start using more of the segment’s offerings.

Block also caters to individuals. The company’s Cash App is a personal finance platform that allows consumers to handle basic tasks, like sending money to others, setting up direct deposit, and buying stocks. Cash App has 57 million users, and it’s growing faster than Block is.

Block’s Bitcoin bet

In 2021, CEO Jack Dorsey talked about his appreciation for Bitcoin (BTC -1.18%). “I don’t think there is anything more important in my lifetime to work on,” he said at a conference that year. His view probably stemmed from the potential for the cryptocurrency to boost economic empowerment and financial freedom, values that match Block’s vision.

In the years since, it’s become clear that Block’s success over the next 20 years will depend more on the trajectory of Bitcoin. And this is perhaps one of the most important factors that investors need to think about.

Block first purchased the crypto for its own balance sheet in October 2020. The company currently owns 8,584 bitcoins, valued at more than $1 billion, according to bitcointreasuries.net. If the crypto’s price keeps going up, the fintech will continue to see unrealized gains.

And the business is also working on real-world Bitcoin initiatives, all supporting Dorsey’s vision to grow its adoption. He thinks it could become a global currency, a view partly supported by the possible rise of artificial intelligence agents that will need to transact with one another using a decentralized, digital, and borderless asset.

Block recently announced that merchants would soon gain functionality to accept cryptocurrency payments from customers on Square. Block sells a Bitcoin self-custody hardware wallet, called Bitkey. And with Proto, it’s developing mining equipment.

Bitcoin doesn’t yet move the financial needle for the company. Cash App started allowing users to trade it in 2018. And in the first quarter this year, this activity brought in just $65 million in gross profit, or about 3% of Block’s entire total.

However, if the digital coin’s price continues to rise in the years ahead, it’s not difficult to see how Block would benefit. Sales of its hardware wallet and mining equipment could soar. Individuals and merchants wanting to use Bitcoin in some way could flock to Block to access various services.

To be clear, Block still looks like a pure-play fintech enterprise right now. But anyone who wants to buy and hold the stock for the next 20 years must factor Bitcoin into their decision-making. Put another way, if you’re not bullish on Bitcoin, then you probably shouldn’t be bullish on Block.