Payments and financial services specialist Block (SQ) couldn’t have asked for better timing for a boost in its retail sales. Although its point-of-sale equipment and business management software are popular with small and medium-sized enterprises, the anxiety over SQ stock is largely centered on the health of the consumer economy, certainly in the aftermath of its 2021 crash. Fortunately, the latest consumer and retail data suggests that such anxieties may be overblown, boding well for Block’s business. Therefore, I am bullish on the financial technology firm shares.
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SQ’s Crash in 2021
On a financial basis, SQ stock has been undervalued for quite some time. However, investors have hesitated to bid up the equity due to its wild ebb and flow. However, positive signs indicate that the hard crash in late 2021 may eventually reverse.
Following the initial impact of the COVID-19 crisis – which saw most equities tumble – SQ stock eventually rocketed higher. Part of the enthusiasm stemmed from the increased interest in retail investing. More fundamentally, the concept of retail revenge helped guide consumer sentiment. Naturally, this helped Block’s business because of the wave of commercial activity.
On a large-scale note, the Federal Reserve also contributed to the rise in SQ stock. During the crisis, the central bank adopted an aggressively dovish monetary policy. With inflation accelerating, there was an incentive to buy products before they became more expensive later. Cynically, this framework benefited Block.
Unfortunately, as inflation got out of control, the Fed began raising the benchmark interest rate. This action halted business expansion and contributed to mass layoffs. Suddenly, SQ stock went from one of the hottest names on Wall Street to one of its coldest.
With the drop in market value, Block became undervalued relative to the underlying infrastructure software industry and the credit services sector. Still, investors hesitated to buy SQ stock in the dip because of the ambiguities of the consumer economy. Factors such as rising credit card debt pointed to many hurting households. Obviously, that’s not a great backdrop.
Retail Sales to the Rescue
Although circumstances didn’t appear conducive to SQ stock despite its apparent valuation discount, the latest U.S. retail sales could change this narrative. As Reuters reported last week, sales jumped more than expected in July, helping to allay concerns about an economic slowdown.
More specifically, retail sales increased by 1% last month. That was a significant improvement over June’s 0.2% decline. Further, economists had forecasted that the metric would rise by 0.3%. In turn, the Fed may have the collection of data it needs to justify an interest rate cut.
That would primarily achieve two purposes. First, a dovish policy would encourage business sentiment as borrowing costs would decline. That could help lift expansionary initiatives such as hiring. Second, controlled inflation would incentivize consumers to shop now rather than wait until prices rise. Both these factors should represent a net positive for SQ stock.
Block’s Valuation
Currently, SQ stock trades at 1.72x trailing-year revenue, which appears almost criminally undervalued. The underlying infrastructure software sector has an average price-to-sales ratio of 4.09. So, if you consider Block a credit services provider because of its buy now, pay later (BNPL) platform, the underlying arena carries a multiple of 2.06x.
In addition, for Fiscal 2024, analysts project that revenue will land at $24.72 billion. If so, that would represent a 12.8% lift from last year’s print of $21.92 billion. Also, in Fiscal 2025, sales may rise to $27.45 billion, up 11% from forecasted 2024 revenue.
Looking further ahead, from 2026 to 2028, Block’s sales may hit $31.68 billion, then $35.9 billion, and finally $40.4 billion. It’s more than likely that, assuming the implications of the retail sales pan out, SQ stock is undervalued.
Right now, Block’s outstanding shares count is 615.65 million. Looking at past data, it appears that in the prior four years, shares outstanding expanded by a compound annual growth rate of 9.22%. Hence, by the end of 2028, this metric could land at just under 876 million.
From 2025 to 2028, analysts, on average, believe that sales will hit $35.99 billion every year. The average number of outstanding shares may be 771.2 million during this time. Considering these data points, along with the market price of SQ stock – which closed at $65.87 on Friday – Block should feature an average projected sales multiple of 1.41x during the post-Biden administration.
A multiple of 1.41x is super low, whether you’re comparing against recent or prior history. Therefore, speculators may want to consider SQ stock if these projections are not detached from reality.
Wall Street’s Take on Block
Turning to Wall Street, SQ stock has a Moderate Buy consensus rating based on 24 Buys, six Holds, and one Sell rating. The average SQ price target is $88.90, implying a 34.96% upside potential.
Takeaway
While Block has always been a relevant player, it has previously failed to get out of the sideways funk following its late 2021 collapse. The concern centered largely on the broader health of the consumer economy. However, the latest retail sales put many doubts at bay. Also, the Federal Reserve may lower interest rates, which could reinvigorate consumers’ sentiment. Given the viability of these fundamental catalysts, SQ stock appears criminally undervalued, making me bullish on the stock.
