Block (NYSE: XYZ) (formerly Square) delivered its second-quarter earnings after the close of trading on Aug. 5, and shares fell by about 6% the next day. Even with a 65% year-over-year jump in adjusted earnings per share, investors focused on weakening growth in the number of Cash App's monthly transacting actives. But the stock's discount may still present an opportunity for patient investors.
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Continue » The biggest story of the quarter was the impact of Block's AI-centered strategy on profits. Adjusted earnings came in at $1.02 per share, well above the $0.87 per share consensus estimate. The market may dismiss this as a one-time beat, but the earnings call points to a structural shift in costs that could support higher earnings over time.
In February, Block announced a 40% reduction in its workforce, citing AI tools that are making software engineers more productive, and leading the company to need fewer of them. The number of code changes per engineer is up 150% since the start of the year. Investors may see this as a temporary margin lift, but management doesn't.
"That way of working ultimately drives improved efficiency over time and greater leverage to our business over time," CFO Amrita Ahuja said. Management expects full-year earnings to grow by 70%. Those higher profits can be reinvested in developing new products that could help drive long-term revenue growth -- an opportunity that may not be reflected in the stock price.
One reason the stock fell was the weakening growth in Cash App's monthly transacting activities. The number of those active users grew just 3% year over year -- a deceleration from the 4% increase in the previous quarter. Growth has cooled as mobile payments have become more competitive, and management is guiding for low-single-digit percentage growth for the full year.
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