Block's Q1 Earnings Selloff: A Buying Opportunity or Red Flag?

Block’s (SQ) stock plummeted 17% after-hours following its Q1 2025 earnings report, as investors reacted to slowing growth, missed revenue targets, and sharply reduced guidance. Yet beneath the headlines lies a complex story of strategic pivots, operational discipline, and lingering macroeconomic challenges. For investors weighing whether to buy the dip or retreat, the selloff presents a critical juncture to assess Block’s long-term prospects.

The Numbers Tell a Mixed Tale

Block’s revenue of $5.77 billion fell short of the $6.2 billion consensus estimate, marking its second consecutive quarter of underperformance. Gross profit grew 9% year-over-year to $2.31 billion, but this paled against the 22% growth rate in Q1 2024. Meanwhile, adjusted operating income rose 28% to $466 million, driven by cost controls that pushed margins to 20%.

The stark contrast between profit growth and top-line stagnation underscores Block’s strategic shift toward the “Rule of 40”—a framework prioritizing combined growth and profitability. Yet investors appear unconvinced.

Cash App: Monetization Gains, Growth Slump

Cash App’s gross profit grew 10% YoY to $1.39 billion, but this represented a sharp slowdown from the 25% growth seen a year earlier. The app’s “gross profit per monthly transacting user” rose 9% to $81, aided by its Card product, which now accounts for 45% of active users. However, weaker inflows and softer spending—particularly in BNPL and direct deposits—highlight execution risks.

The company’s push into buy now, pay later (BNPL) via Cash App Borrow could be a bright spot. If adopted widely, this service could boost monetization beyond its current $81/user level. Yet competition looms large: PayPal’s Venmo, Chime, and fintech upstarts are all vying for the same consumer wallet.

Square’s International Ambitions

The Square segment (Block’s merchant-focused division) saw gross profit grow 9% YoY to $898 million, with international GPV rising 15%—outpacing U.S. growth of 5.6%. This geographic diversification is a strategic win, as mid-market sellers (those processing over $500,000 annually) now account for 41% of Square’s GPV, up from 39% a year ago.

The Guidance Cut: A Reality Check or Overreaction?

Block slashed its 2025 gross profit guidance to $9.96 billion (12% YoY growth), down from a prior target of $10.22 billion. Q2 guidance was also reduced to $2.45 billion, implying growth could dip below 10% for the first time in years. CEO Jack Dorsey’s successor, Hosain Rastegar, blamed “changes in consumer spending patterns” for the Q1 miss but projected a rebound by late 2025.

Analysts at KeyBanc and Bernstein responded by lowering price targets, citing sector-wide fintech headwinds. However, Block’s adjusted EBITDA margins rose to 15% (up from 13% in Q1 2024), signaling operational resilience.

The Bulls’ Case: A Buying Opportunity?

At its post-earnings low of $48.05, Block’s stock trades at just 5.7x its 2025E gross profit—a valuation discount compared to peers like PayPal (PAYPal) at 6.5x. For long-term investors, this could reflect irrational pessimism.

• Cash App’s potential: Its 25 million Card users and 45% of active users using the Card product suggest deeper engagement. If BNPL adoption accelerates, this could reignite top-line growth.
• Square’s global expansion: International GPV’s 15% growth outperformed the U.S., and mid-market sellers’ rising contribution signals a shift toward higher-margin clients.
• Rule of 40 compliance: Block’s 9% growth + 20% margin = 29%, still below the 40% target, but improving from prior quarters.

The Bears’ Warnings: Risks Remain

• Consumer caution: Block’s Q1 results coincided with broader macroeconomic softness, particularly in discretionary spending. If the U.S. economy weakens further, Cash App’s spending metrics could suffer.
• Competitive pressures: BNPL is a crowded space, and Square faces stiff competition from Stripe and PayPal in merchant services.
• Execution uncertainty: Block’s ability to revitalize growth hinges on new products like Cash App Borrow and Square’s international push—neither of which have proven scalable yet.

Conclusion: A Patient Investor’s Play?

Block’s selloff has created a valuation trough, but its future hinges on two variables: consumer spending recovery and execution on its strategic priorities. At current levels, the stock offers a 12% YoY gross profit growth trajectory at a discount to peers—a compelling entry point if the company can deliver on its Q4 growth targets of “mid-teens” gross profit expansion.

However, investors must weigh the risks: if macro conditions worsen or competition intensifies, Block’s reliance on margin improvements over top-line growth may not be enough. For now, the selloff offers a chance to buy a fintech leader at a 35% discount from its 52-week high—a price that reflects both current struggles and long-term potential.

The verdict? Block’s stumble could be a buying opportunity—for those willing to bet on a rebound in late 2025. But as the stock’s post-earnings drop shows, patience will be required.