Block: The Dark Horse of Fintech

Block (SQ), the company formerly known as Square, is a San Francisco-based financial services and digital services company founded in 2009 by Jack Dorsey and Jim McKelvey. This company is one of the most-touted fintech stocks on the market and one that’s been absolutely hammered by the market.

This week, the selling pressure continued, with investors seeming to view this stock’s valuation as one that needed a haircut. Like other high-flying tech stocks, Block has been hit hard by a mass de-risking of the market of late.

Right now, I’ve shifted my view from bullish to neutral on Block. This company’s prospects remain strong over the long term. However, investor concerns around valuation may provide continued headwinds from here. For cautious investors, this is certainly a difficult stock to assess right now.

Let’s dive into what’s been driving this volatility and why investors may want to be cautious with Block right now.

Block Dropping On Earnings That Aren’t Their Own

Interestingly, the key catalyst behind Block’s recent decline has been relatively poor results from fellow fintech giant PayPal (PYPL). Block isn’t scheduled to report its earnings until February 24. However, until then, investors appear to be looking for clues as to what may be to come, digging into PayPal’s earnings for insights.

What investors are finding, they don’t seem to like.

PayPal stock dropped 24% in one session last week on news that the company’s forward-looking guidance was, shall we say, less than optimistic. The company is reportedly taking a muted view toward forward guidance to adjust for macro factors that are outside of the company’s control. These included inflation and lower consumer spending, alongside supply chain issues that are likely to reduce transaction volumes, at least over the medium term.

PayPal’s user growth estimates missed, as did the company’s bottom line numbers. While PayPal did beat on the top line, the beat was small, and investors appear to be more concerned about the bearish outlook the company is taking moving forward than the backward-looking numbers.

Various analyst downgrades have come about for PayPal as a result of these earnings. Whether the same will be the case for Block remains to be seen. However, for now, investors have little to go on other than expectations, and expectations are low right now.

The Aftermath of the Afterpay Acquisition

Interestingly, on this PayPal news (PayPal is also the parent of Venmo), buy now pay later companies like Affirm (AFRM) took a hit. For Block, which just integrated Afterpay (an Australia-based BNPL company) into the fold, that’s not a good thing.

Indeed, the headwinds facing PayPal/Venmo are being directly ascribed to Block, irrespective of the company’s earnings date being a few weeks away. Investors seemingly have the clarity they need with the forward-looking outlook for fintech stocks. Right now, it’s not looking good.

Notably, investors in Block may be concerned about the price tag paid for Afterpay. The $29 billion acquisition was one that the company projected could provide a $100 billion revenue opportunity over time. As of right now, that opportunity appears to be dwindling, with an “overestimation” penalty likely to continue to be imposed.

Should consumer spending continue to drop, this Afterpay deal is one that investors may wish didn’t happen at all. Again, investors will get a clearer picture in three weeks. However, currently, it’s hard to suggest that Block will produce a massive beat on the heels of this PayPal miss.

Wall Street’s Take

Turning to Wall Street, SQ stock is a Strong Buy. Out of 21 analyst ratings, there are 17 Buy recommendations and four Hold recommendations.

The average Block price target of $230.76 implies 119% upside potential. Analyst price targets range from a high of $322 per share to a low of $150 per share.

Bottom Line

Block’s status as a top fintech stock for long-term investors remains intact. However, the question is – for new investors looking to put fresh capital to work in SQ stock, is now the time?

There may be more downside on the horizon, given how bearish the market is right now. Accordingly, it’s buyer beware in the markets these days. Unfortunately for Block, that means this earnings season may not be a happy one.

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