Shares of Block (NYSE: SQ) finished last week with a bang, climbing more than 25% in just two trading sessions, and it continued its momentum this week. Indeed, rates are on the retreat following a cooler-than-expected CPI report. As further evidence of peaking inflation comes rolling in, unprofitable growth companies may be in for a bit of a melt-up. Despite the epic fall in SQ stock, Block still stands out as one of this market’s most intriguing financial innovation companies. Investors have soured on innovation as a whole amid rising rates. As the tides turn and the Fed moves from triple to single rate hikes or even a “pause,” this market’s biggest dogs could have the means to rally going into 2023.
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For Block and the rest of the pack, it’s been all about rates. Tech layoffs have come fast and furious over the past few months. The announcement of such cuts has been met with a positive reaction from Wall Street. Undoubtedly, the tech bloodbath has caused the focus to be shifted from investing in growth to leaning out and maximizing operational efficiencies.
Indeed, Block may be the next tech titan putting its employees on notice as the company looks to pull the brakes on money-losing initiatives and position the firm to inch closer to becoming more profitable. Industry layoffs are never fun. However, they seem unavoidable as cash becomes harder to come by.
With fresh upside momentum, a solid third quarter in the books, and one of the most influential visionary leaders in Jack Dorsey at the helm (as the so-called “Block Head”), it’s hard to stay bearish on SQ stock. I remain bullish on the stock.
Block’s Cash App is the Star of the Show
Cash App recovered significantly in the third quarter, with gross profits surging to $774 million, up a whopping 51% year-over-year. Weakness in Bitcoin (BTC-USD) continued to weigh down the results, but with recession headwinds already moving in, Cash App’s resilience is respectable thus far. Cash App continues to be the star of the show. With a strong network and robust results despite fading consumer sentiment, I think it’s a mistake to underestimate the firm’s ability to surpass low expectations in a recession year.
Undoubtedly, the $29 billion all-stock deal for Australian BNPL (Buy Now Pay Later) firm Afterpay looks to have introduced risk in the face of a recession. As indebted consumers feel the pinch, it may be tougher to pay back the incremental bills as they come due.
In any case, there’s no denying that the inclusion of the service has strengthened the Block ecosystem from a long-term perspective. Cash App is becoming more useful by the day, putting it in a clash with industry rival PayPal (NASDAQ: PYPL).
At this juncture, it’s tough to tell where Jack Dorsey is headed next with Cash App as it looks to differentiate itself from Venmo and other competing digital wallets.
With intriguing Bitcoin projects (think Spiral and a strange division called TBD), Dorsey is more than willing to spend money to be on the cutting edge of blockchain and cryptocurrency technology. Even as Bitcoin continues to sink (the latest FTX blowout is behind the crypto’s latest plunge), I continue to view Block as one of the best long-term plays to play the future of blockchain technology.
The company is now named Block, after all!
In any case, Block’s strong network (Square and Cash App) should make any new features a likely success once they’re ready to be introduced.
Is SQ Stock a Buy, According to Analysts?
Turning to Wall Street, SQ stock comes in as a Moderate Buy. Out of 27 analyst ratings, there are 20 Buys, six Holds, and one Sell recommendation. The average Block price target is $85.63, implying upside potential of 16.7%. Analyst price targets range from a low of $49.00 per share to a high of $120.00 per share.
Takeaway: SQ Stock is Showing Signs of Life
Shares of Block are starting to show signs of life after its recent surge. Still, risks remain, as payments could turn lower in a recession year while the industry looks to pull the brakes on money-losing growth projects.
With so many SQ stock downgrades already in the books, expectations seem too low. Further, the stock is trading at a rock-bottom 2.6x sales.
If the Fed pauses next year, a soft landing seems increasingly likely. Such a scenario could cause the innovation trade to heat up, though likely not to the same extent as in 2021!
At this juncture, I see few firms as innovative in the fintech scene as Block.
