Block, Inc: Correcting for Negative Earnings

Block, Inc. (SQ), is perhaps one of the most well-known companies in the fintech and blockchain space. Its presence was popularized by its owner and former Twitter CEO Jack Dorsey, but it is at present failing to live up to some investors’ expectations. Block’s share price has been severely discounted while still trading at a high premium. The stock is trading 70% below its recent highs and is currently down 52.48% YTD. Additionally, the stock is also severely underperforming the MarketBeat consensus price target, which suggests it is not meeting analysts’ expectations.

Block’s Q1 FY2022 Earnings

For the most recent quarter, Block finished its acquisition of Australian fintech company Afterpay, which was one of the company’s most high-profile purchases. Between the company’s acquired companies and its own growth, it saw gross payment volume grow 31% YoY to $43.5B with an operating loss of $226M. This loss was down from a profit of $68M in the previous quarter. One major win for the company is that its gross profit grew 34% YoY to $1.29B. It should be noted that Cash app, another of Block’s companies, contributed 48% of the gross profit, up 4% from last quarter.

Square Faces Crypto Headwinds

Despite the company’s diversified fintech offerings and operating segments, Square is thought of by many to be primarily a crypto stock, which is currently in the midst of transitioning into a severe bear market. Bitcoin only contributed 3% to the company’s gross profit in Q1 FY 2022. Meanwhile, the cryptocurrency is down 35.55% YTD. Risky and volatile assets such as bitcoin as usually the first positions to be liquidated during heightened periods of fear and uncertainty. Some more bad news for the crypto market is that its correlation with the S&P 500 recently hit a 17-month high. Many investors were forced to sell off their positions or simply have a bearish outlook on the markets in general. 

Block is struggling with profitability. The company’s GAAP EPS has been in the negative these last three quarters and widening losses are forecasted for the company. Analysts gave the expectation that the company’s profitability will begin to turn around late into FY 2023. A key factor in the company’s losses is its adjusted EBITDA margin, which is expected to reach its lowest point value in Q2 next year at just 3.4%. Continuing from this inflection point the company is expected to gradually improve its margins and earnings, reaching an EBITDA YoY change of 95% in Q2 FY 2023.

Block’s Opportunities

Despite the company’s struggling margins and projected EPS underperformance, Block is exploring several avenues to help boost its TAM and reach profitability faster. One way the company is doing this is through its adoption of the bitcoin lightning network, which will allow for bitcoin payments to be made between users on the app for free of charge. Another avenue the company is exploring is targeting teens who are 13 and above to deposit cash at retailers such as Walmart that can then be reflected in their app balances. This offering to young adults is expected to increase the company’s total addressable market by 20 million users and increase it by 30%.

Block’s Technical Outlook

Despite trading at multiples lower than its peak and going for a ride with the rest of the market towards capitulation, the sell-off in Block was not as violent as seen in many other fintech stocks, especially those that derive most of their assets in bitcoin. The business seems sufficiently diversified across the revenue streams of its acquired companies to not have a single point of weakness or failure, and the market has apparently recognized this and its potential opportunities.

Over the short term, Block’s share price is set to slide lower. Given its normalized P/E ratio of 91.12x this may not be catastrophic for the company’s long-term outlook, as it could easily be argued that the stock is presently overvalued at its current levels. If the market manages to rebound, Block has a lot of avenues to explore to help restore its share price back to its former levels.