Plunge 20%, under headwinds the 'small players' get hit harder

On the morning of May 2nd Beijing time, after the U.S. market closed, the U.S. version of "Alipay" $Block(XYZ.US) saw its stock price plummet over 20% in a single day after releasing its Q1 2025 earnings report. What "bomb" in the results caused such a steep drop? Dolphin Research will explore this with everyone:

1. Overall Performance—Double Miss on Growth and Profit: This quarter, Block's total revenue was $5.77 billion, shocking with a 3.1% YoY decline, significantly below the market's expectation of 4.4% growth. While this was mainly due to the sharp drop in the cryptocurrency market, which dragged down the proprietary BTC trading business (accounting for over 1/3 of total revenue) with a 16% YoY decline, even the core revenue growth (excluding BTC trading) slowed from 10.8% last quarter to 7.6%, also below the market's expectation of 10.5%. Although management had indicated last quarter that Q1 would be a low point, the actual results were worse than anticipated.

On the profit front, the company's most-watched gross profit grew only 9.3% YoY, a cliff-like slowdown from 14.1% last quarter and below the market's expectation of 10.9%. GAAP operating profit was $330 million, about 9% lower than the expected $360 million. In summary, this quarter's performance was weak on both growth and profit.

2. The Last Pillar, Cash App, Also "Collapses": In recent quarters, the Square segment's single-digit growth had already dampened market expectations. The company's recent performance had been propped up by the strong growth of the Cash App segment (which still had a 30% revenue growth rate as of Q3 2024). Thus, the Cash App segment's growth also plunging this quarter is the biggest issue reflected in the results.

Specifically, excluding BTC trading, Cash App's core revenue grew only 9.4% YoY to $1.58 billion, also slipping into single-digit territory. This is far below last quarter's actual growth and the market's expectation of around 14% for this quarter.

On core operational metrics, Cash App's monthly active users have stagnated at around 57 million for five consecutive quarters, with YoY growth officially hitting 0% this quarter, highlighting the significant growth bottleneck Cash App has encountered.

The most critical metric, cash inflow (new funds flowing into the Cash App ecosystem) grew only 8% this quarter, a sharp drop from 12% last quarter.

In reality, the market has almost become "numb" to the user growth stagnation issue. Even if user numbers stop growing significantly, increasing user stickiness, product usage, and cash inflow could still drive decent revenue and profit growth. Before the earnings report, the market was relatively optimistic about Q1 growth due to seasonal tax refund benefits. Additionally, the recent launches of Cash App Borrow (small short-term consumer loans) and Cash App Card's BNPL (buy now, pay later) feature were expected to boost growth. However, the actual performance was disappointing.

3. Square Continues to Decline Sharply, SMBs Hit Harder: The merchant-facing Square segment, unsurprisingly, continued to worsen. This quarter's revenue grew 7.1% YoY (with about 1% negative impact from forex and Easter timing), not much slower than last quarter's 8.7%. However, the market had expected growth to bottom out and accelerate to 9.6%, so the continued slowdown represents a directional misjudgment.

On core operational metrics, total payment volume processed through Block's ecosystem was $56.8 billion, with growth slowing to just 4.5% YoY, a nearly 40% drop from last quarter's 7.7%. By channel, this was mainly due to a 32% YoY decline in Cash App Pay volume. Cash App Pay volume has now shrunk YoY for five consecutive quarters by 20%~40%, signaling the effective failure of Cash App Pay.

The larger Square ecosystem processed $54.1 billion in payments, up 7.3% YoY, but still slowing by 2.6 percentage points from last quarter. While relatively resilient, the slowdown is undeniable. Further breakdown shows the smallest merchants (annual payment volume below $125,000) saw payment volume grow only 2.5% YoY, while medium and large merchants grew 6% and 13%, respectively. This confirms that under macro headwinds, smaller businesses are suffering disproportionately.

High-frequency data showing steep declines in U.S. restaurant spending and TSA checkpoint traffic further underscores the weakening discretionary spending, especially among lower-income groups facing tariff impacts.

4. As mentioned earlier, the company's most-watched profitability metric—overall gross profit—grew only 9.3% YoY, a cliff-like slowdown from 14.1% last quarter.

By segment, Cash App (excluding BTC) delivered $1.32 billion in gross profit, up just 12% YoY, far below market expectations and last quarter's ~16% growth. The perpetually weak Square segment saw gross profit grow 9.5%, slightly better than expected but not enough to change the trend. Overall, despite sharply slowing revenue growth, operational leverage allowed profit growth to outpace revenue.

5. Adding insult to injury, amid an already tough macro environment and slowing revenue growth, the company is "unfortunately" in a marketing investment cycle to promote Cash App's new features. This quarter's marketing expenses surged nearly 14% YoY, far outpacing revenue and gross profit growth. R&D and administrative costs also rose ~6% and 4%, respectively. Despite recent reports of ~8% staff cuts to "improve efficiency," savings have yet to materialize. Thus, with growth stalling, cost controls failed to squeeze out profits. GAAP operating margin was 0.1 percentage point below expectations.

6. Next Quarter Guidance Misses, Full-Year Guidance Cut: Beyond the weak quarterly results, Block's below-consensus guidance for next quarter and the full year also fueled the post-earnings plunge.

Specifically, Q2 gross profit guidance of $2.45 billion implies 9.5% YoY growth, slightly better than this quarter but well below the $2.53 billion and 13.5% growth consensus expected. Adjusted operating profit guidance of $450 million also missed the $530 million consensus. While an improvement from Q1, this still deals a blow to hopes for a rapid post-Q1 rebound.

For full-year 2025, the company cut gross profit growth guidance from 15% to 12% and adjusted operating profit from $2.1 billion to $1.9 billion (a 10% reduction). The market had largely expected unchanged guidance.

Dolphin Research's View:

Overall, Block's earnings were clearly quite poor, worsening further from last quarter. Both revenue and profit growth slowed markedly and missed expectations.

By segment, while the stagnant B2B Square business had been offset by strong C2C Cash App growth keeping overall results somewhat palatable, this quarter's plunge in Cash App revenue and gross profit growth to just ~10% leaves the company with no "fig leaf."

Meanwhile, cutting full-year gross profit growth guidance to 12% (vs. Q1's 9.3%) implies only modest improvement in H2 (implied guidance of ~14% growth).

Operationally, despite rolling out Cash App Borrow and BNPL features, these seem to be driving little incremental revenue while front-loading marketing costs.

Fundamentally, given macro weakness and tariff impacts, Block's core SMB and lower-income consumer base faces disproportionate pressure with less resilience. Thus, earnings are more sensitive to these headwinds, warranting caution.

The sole "bright spot" is that after recent steep declines, Block's sub-$30 billion market cap implies just ~16x 2025 guided adjusted operating profit ($1.9 billion). Even after taxes, valuation stays below 20x. While matching the poor performance, 16x isn't cheap. But with expectations and valuations reset, any H2 or 2026 recovery could drive outsized upside.

Key charts below:

1. Square Segment

2. Cash App Segment

Key operational metrics show Cash App's monthly active transactions reached 57 million by quarter-end, with YoY growth slowing to just 2%, confirming clear user engagement stagnation. Thanks to 10% growth in average transaction size, Cash App's inflow still grew 12%. However, volume growth is generally healthier than price growth.