Shares of Block (SQ) have been under heavy selling pressure, falling close to 40% over the past six months, including 14% decline in thirty days. Meanwhile, its shares have fallen 33% over the past year, trailing the 7% rise in the S&P 500 index. It would be an understatement to say that the fintech specialist has felt the recent pullback in the tech sector.
The payments processing specialist will report third quarter fiscal 2023 earnings results after the closing bell Thursday. The market has become less optimistic about Block's growth potential, which is closely tied to the company’s ability to not only expand its product offerings, but also to enter new international markets. However, the company’s struggles presents a buying opportunity, according to Bank of America analyst Jason Kupferberg.
Calling the stock's recent pullback “unjustified,” Kupferberg last week reaffirmed his Buy rating on Block, and pointed out that the stock trades near a historically low valuation at 2.9 times his 2024 enterprise-value-to-EBITDA estimate. Originally called Square, and known for its peer-to-peer money-transfer service Cash App, the company rebranded its name to Block to present an emphasis on its shift towards blockchain technology.
Although Block continues to build out what it envisions as a decentralized finance business using cryptocurrency, the management expects Cash App, which is already used to buy and sell Bitcoin, to lead the new business. Cash App is poised to remain a profit center for Block and will drive the company's consolidated gross profit growth. On Thursday, however, investors will want more details on the company's growth initiatives, along with Cash App’s expansion to assess where the stock valuation should be.
For the three months that ended September, Wall Street expects the San Francisco, Calif.-based company to earn 47 cents per share on revenue of $5.43 billion. This compares to the year-ago quarter when earnings came to 42 cents per share on revenue of $4.49 billion. For the full year, ending in December, earnings are projected to rise 76% year over year to $1.76 per share, while full-year revenue of $21.53 billion would rise 22.8% year over year.
Concerns of slowing growth, compressing margins and rising competition from the likes of PayPal (PYPL) has pressured the stock which currently sits at a 52-week low. This is even though Block has posted a beat on both the top and bottom lines in five straight quarters. The company’s CEO Jack Dorsey has discussed the importance of achieving financial flexibility so the company can invest in various new technology concepts.
Dorsey has also outlined a new long-term investment framework aimed at improving the company’s earnings quality. For these reasons, the stock was initiated as a Buy at Berenberg Capital Markets. Analyst Mark Palmer calls the stock's pullback represents an attractive entry point. "Management's sharpened focus on controlling the growth of Block's operating expenses has enabled it to demonstrate the significant operating leverage inherent in its business model," said Palmer.
These initiatives have gained traction, evidenced by the double beat in Q2. Block posted an adjusted loss of 20 cents which beat by 1 cent, while revenue of $5.53 billion rose 25.67% year over year, topping forecasts by $433 million. Q2 gross payment volume of $59 billion was also better than the $58.5 billion consensus. Cash App generated $3.56 billion of revenue in Q2, with gross profit of $968 million which grew 4% from Q1 and 37% year over year. Cash App monthly transacting actives rose to 54 million during the quarter.
Meanwhile, the Square ecosystem generated $1.93 billion revenue, beating the $1.67 billion in Q1. Gross profit of $888 million grew 15% from Q1. On Thursday investors will look to see whether these metrics can improve, along with the details provided by management outlining ways to strengthen the company’s earnings quality.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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