Block (NYSE: SQ) shares are currently hovering at the same levels they were trading all the way back in 2018. Does this signal a buying opportunity? In my view, probably, yes.
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Admittedly, several headwinds are impacting the company’s performance, including lower Bitcoin (BTC-USD) related revenues and economic growth slowing down, which is negatively influencing the performance of Block’s merchants. Nevertheless, Block’s ecosystem continues to develop rapidly, with CashApp delivering increasingly attractive metrics. Block’s international expansion also appears quite compelling, while profitability is gradually improving. Accordingly, I am bullish on the stock.
Robust Growth Despite Softer Bitcoin-Related Fees
Bitcoin-related fees boosted Block’s revenues last year considerably. With cryptos in general, including Bitcoin, seeing considerably lower trading volumes this year, the company has lately lacked such an external top-line driver. Nevertheless, Block’s core businesses continue to perform well, driven by the company’s innovative solutions. Despite a tough year-over-year comparison due to crazy Bitcoin-related activity last year, Block still managed to grow revenues by 17.7% in Q3.
Cash App Remains Dominant
Block’s growth continues to be driven largely by Cash App, which has consistently held the #1 spot in the U.S. Appstore’s Finance category. The app’s capabilities, simplicity, and overall convenience are simply unparalleled, resulting in growing market penetration. Block reported that by September end, there were roughly 18 million active Cash App cards, up more than 40% year-over-year, with weekly and daily active cards actually growing at an even swifter rate against the prior-year period. This is reflected in the company’s year-over-year revenue growth of 36% to $2.75 billion if Bitcoin-related revenues are excluded.
Subscriptions & Services
Block is also seeing great success in its Subscription and Services-Based segment, whose revenues reached $1.19 billion in Q3, up 71% compared to last year. Admittedly, the massive increase was partially attributed to the relatively recent acquisition of Afterpay, the Buy Now, Pay Later (BNPL) company. Still, excluding BNPL, the segment’s revenues increased by an impressive 47% to $698 million.
International Expansion Efforts Have Been Working
Another growth catalyst for Block has been its international expansion efforts, which have been bearing fruits lately. For instance, the company has been capitalizing on the rapid growth of QR payments in Japan. With PayPay growing to be the dominant QR code wallet in Japan (over 51 million customers and more than two-thirds of the country’s QR code Gross Payments Volume), Block began allowing sellers to accept PayPay QR code payments in person via Square POS, Square for Retail, and Square Appointments. Other developments during Q3 include Block introducing Instant Transfers in Australia and Square Loans in the UK.
Through such developments and continuous innovation in the fintech space, Block has been experiencing accelerating growth in non-U.S. markets. For context, while Square GPV (Gross Payments Volume) in Block’s U.S. market grew 17% year-over-year in Q3, GPV growth in its international markets was 40% during the period. That’s quite impressive, considering international revenues were being impacted heavily by a strong U.S. dollar. On a constant-currency basis, Square GPV in Block’s international market actually rose 55%.
Profitability is Improving
Besides its robust revenue growth in a shaky market environment, I am impressed by Block’s improving profitability, which primarily backs my bullish thesis. In Q3, Block produced a gross profit of $1.57 billion, a 38% year-over-year increase. Around half of that, $774 million, was generated by CashApp, whose gross profits grew 51% year-over-year. Square contributed the remaining amount, generating a gross profit of $783 million, up 29% year-over-year.
I expect Block’s gross profit margin to continue improving, driven by operating efficiencies, synergies, and purpose-built solutions in its ever-expanding fintech ecosystem. Block’s success in its international markets should also contribute significantly to gross profit growth, as competition is not as tough as it is in the U.S., which could allow for juicier margins. International gross profits as a percentage of Square’s gross profits reached 15% in Q3, gradually expanding from 5% in Q3 2018, illustrating this point. Higher gross profits drove adjusted EBITDA to $327 million in Q3, up 40.3% compared to last year.
Note that while the company is expected to post earnings-per-share of $1.09 for Fiscal 2022, which implies a year-over-year decline of 36.4%, the drop is mostly due to one-off, non-cash items related to impairments, write-offs, and the change of value in its investments, such as Block’s bitcoin-related losses. Specifically, in Q4 2020 and Q1 2021, Block invested $50 million and $170 million in Bitcoin, respectively. At the end of Q3, the value of its Bitcoins stood at $156 million, triggering GAAP losses.
With analysts excluding such one-off effects in their future earnings estimates, Square is expected to generate earnings per share of around $1.73 in Fiscal 2023 and $2.56 in Fiscal 2024, implying growth rates of 59.2% and 52.9%, respectively. Thus, unless Block is to suffer more losses from the change in the value of its Bitcoin and other investments, profitability should surge in the coming years, driven by the underlying success of its core businesses.
Is SQ Stock a Buy, According to Analysts?
Turning to Wall Street, Block has a Moderate Buy consensus rating based on 22 Buys, five Holds, and one Sell assigned in the past three months. At $87.04, the average Block price target implies 41.7% upside potential.
Takeaway: A Beaten-Down Fintech on the Cheap
Shares of Block have been beaten down brutally lately. The stock is down over 60% over the past year, which explains why it’s trading at the same levels it did back in 2018. In the meantime, however, Block has been achieving meaningful developments which have positioned it to achieve strong profits in the near future. Once market conditions normalize, it’s more than likely that Wall Street will adjust its sentiment toward a more positive note, which is why I am bullish on the stock.
