Block Stock Nears Multi-year Low, Is it the best time to BUY?

Block (NYSE: SQ) shares are currently trading at the same levels they were trading in 2018. Is this a hint of a buying opportunity? In my opinion, the answer is very likely yes.

Several headwinds are affecting the company’s business, including reduced Bitcoin (BTC-USD) related sales and decreasing economic development, which is affecting the performance of Block’s merchants. Nonetheless, Block’s ecosystem is fast expanding, with CashApp providing increasingly appealing metrics. Block’s foreign expansion appears to be quite appealing, and profitability is progressively rising. As a result, I am optimistic about the stock.

Despite lower Bitcoin-related fees, growth remains robust.

Bitcoin-related fees significantly increased Block’s revenue last year. With cryptocurrency trading volumes in general, including Bitcoin, significantly lower this year, the company has recently lacked such an external top-line driver. Nonetheless, Block’s core businesses are performing well, thanks to the company’s unique solutions. Despite a difficult year-over-year comparison due to insane Bitcoin-related activity last year, Block increased revenues by 17.7% in Q3.

Cash App Remains the King

Block’s success is still entirely driven by Cash App, which has routinely ranked first in the U.S. Appstore’s Finance category. The powers, simplicity, and overall convenience of the app are simply unrivaled, resulting in increased market penetration. Block revealed that by the end of September, there were around 18 million active Cash App cards, an increase of more than 40% year over year, with weekly and daily active cards expanding at an even faster rate than the prior-year period. If Bitcoin-related revenues are eliminated, the company’s revenue increased 36% year over year to $2.75 billion.

Subscriptions & Services Block is also enjoying strong growth in its Subscription and Services-Based business, with revenues of $1.19 billion in Q3, up 71% from the previous year. To be sure, the large growth might be credited in part to Afterpay, the Buy Now, Pay Later (BNPL) company’s recent acquisition. Nonetheless, removing BNPL, the segment’s revenues climbed by 47% to $698 million.

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International Expansion Efforts Have Produced Results

Block’s worldwide expansion initiatives, which have recently borne fruit, have been another growth factor. For example, the company has taken advantage of the increasing expansion of QR payments in Japan. Block began allowing sellers to accept PayPay QR code payments in person via Square POS, Square for Retail, and Square Appointments as PayPay grew to be the dominant QR code wallet in Japan (with 51 million customers and more than two-thirds of the country’s QR code Gross Payments Volume). During the third quarter, Block introduced Instant Transfers in Australia and Square Loans in the United Kingdom.

Block has seen accelerated growth in non-US regions as a result of such breakthroughs and continual innovation in the fintech field. In comparison, although Square GPV (Gross Payments Volume) in Block’s US market increased by 17% year on year in Q3, GPV growth in its overseas markets increased by 40% during the same period. That’s fairly excellent given that international revenues were strongly influenced by a strong US currency. Square GPV increased by 55% in Block’s international market on a constant-currency basis.

Profitability is increasing.

Aside from its strong sales growth in a volatile market, I am intrigued by Block’s growing profitability, which essentially supports my optimistic thesis. Block earned $1.57 billion in gross profit in the third quarter, up 38% year on year. CashApp generated over half of that, $774 million, with gross earnings increasing 51% year on year. Square provided the remaining funds, resulting in a $783 million gross profit, a 29% increase year over year.

Block’s gross profit margin will likely continue to improve as a result of operational savings, synergies, and purpose-built solutions in its ever-expanding fintech ecosystem. Block’s performance in international markets should contribute considerably to gross profit growth, as competition is not as fierce as it is in the United States, perhaps allowing for higher margins. International gross earnings as a percentage of Square’s gross profits reached 15% in Q3, progressively increasing from 5% in Q3 2018. Increased gross profits pushed adjusted EBITDA to $327 million in Q3, up 40.3% from the previous year.

While the business expects to earn $1.09 per share in Fiscal 2022, a 36.4% decrease from the previous year, the drop is mostly attributable to one-time, non-cash expenses relating to impairments, write-offs, and changes in the value of its investments, such as Block’s bitcoin-related losses. Block invested $50 million in Bitcoin in Q4 2020 and $170 million in Q1 2021, respectively. At the end of the third quarter, the value of its Bitcoins was $156 million, resulting in GAAP losses.

Square is predicted to generate earnings per share of roughly $1.73 in Fiscal 2023 and $2.56 in Fiscal 2024, reflecting growth rates of 59.2% and 52.9%, respectively, if analysts exclude such one-time effects in their future earnings predictions. Thus, unless Block suffers further losses as the value of its Bitcoin and other investments fluctuates, profitability should increase in the next years, driven by the underlying performance of its core businesses.

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Analysts say SQ stock is a good buy.

When it comes to Wall Street, Block has a Moderate Buy consensus rating based on 22 Buys, five Holds, and one Sell in the last three months. The average Block price target of $87.04 implies a 41.7% upside potential.

Conclusion

Block’s stock has recently been viciously battered down. The stock has dropped more than 60% in the last year, which explains why it is trading at the same levels it did in 2018. In the meantime, Block has made significant progress, positioning it to generate significant profits in the foreseeable future. Once market conditions stabilize, Wall Street’s opinion is likely to shift toward a more favorable tone, which is why I am bullish on the stock.

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