Court filings made public on October 8 revealed that the Federal Trade Commission is investigating whether Block (NYSE:XYZ) left customers with frozen Square and Cash App accounts without enough help. That is an awkward headline for a company whose results have rarely looked better. The surprise in the second quarter was where the growth came from: lending to Cash App customers, not payments or bitcoin. So the question is whether the costs of that lending, and of running after a large staff cut, are starting to catch up with the profit. Square sells card readers, payment processing, and software to restaurants and shops. Cash App lets tens of millions of people send money, spend through a debit card, and borrow small amounts. Growth is strong, and the price looks modest beside it, yet the adjusted profit behind that price leaves out costs that are rising fast.
Gross profit rose 25% in the second quarter, with Cash App up 31%. Much of that came from Cash App Borrow, the short-term loan product, which helped lift consumer lending originations 59% to $18.9 billion. Block’s Financial Solutions unit, where that lending shows up, grew gross profit 43%, up from 20% a year earlier. Bitcoin moved the other way. Gross profit from the bitcoin business fell 31% because the company cut a trading fee and activity slowed. That business sells a lot of bitcoin but keeps little as profit, so lending now matters far more to the results. Investors who want more stocks like this one can find Block in our recent list of 9 Best Bitcoin Stocks to Buy Now.
Square’s Payments Business Is Speeding Up
Square is picking up speed too. Its gross profit grew 13%, helped by a one-time tariff reimbursement, and US payment volume growth reached 10%, the strongest pace since the second quarter of 2023. That ends a slower stretch at the end of 2025. If you’re interested in digital payments, we recently compiled a report on 7 Best Fintech Stocks to Buy as Digital Payment Volume Surges.
Costs Are Rising Behind the Adjusted Profit
Bloomberg noted that the FTC’s filings point to Block’s large workforce cut and its push to use artificial intelligence. They also say customers got little help even after finishing identity checks, so the probe is about how a leaner operation treats the people it serves.
Costs already show up in the results. Transaction, loan, and consumer receivable losses rose 99% on a GAAP basis, mostly because Block is making more loans, and legal accruals pushed up administrative expenses. That is why adjusted earnings per share of $1.02 sit far above the GAAP figure of $0.15, and why net margin over the past 12 months was only 1.43%.
Management expects growth in loan losses to cool through the rest of 2026, and it says loss rates on its Borrow cohorts remain healthy. If that holds, lending keeps growing without eating the profit. A shareholder is betting on exactly that, while hoping the probe adds little to the legal bill.
Investors Are Pricing In an Earnings Rebound
Block trades at about 19 times estimated 2026 earnings. This forward P/E divides the share price by the profit per share analysts expect, so a lower number means investors pay less for each dollar of expected earnings. That sits well above the sector median of 10.88 but far below Block’s own five-year average of 41.10. It also rests on adjusted earnings, which leave out the legal and restructuring charges above.
Growth explains most of the premium to peers. Analysts expect adjusted earnings per share to rise about 71% in 2026, so the multiple is far less demanding against that growth. For investors looking for cheaper growth names, our list of 10 Undervalued Growth Stocks to Buy Now covers more names.
Big investors have been adding. Hedge funds holding Block rose to 76 in the second quarter from 63 in the first, so more active funds now back the story. Short sellers, who borrow shares to profit from a drop, hold 3.08% of shares outstanding. That is a small bet against the stock, and it pays off if loan losses or legal costs weigh on the price.
So are the costs catching up? In the GAAP results, they are, while adjusted results still show profit pulling ahead. Block’s next report, due early next month, will show whether loan losses are cooling as promised and whether legal charges are still climbing.
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This article is originally published at Insider Monkey.
