To control persistently elevated inflation and maintain economic stability, the Federal Reserve raised interest rates to levels not seen in 22 years. The financial industry gains significantly from higher interest rates since they result in increased profit margins and investment income.
Moreover, the widespread use of mobile and internet technology has contributed to the robust demand for online financial services, particularly following the COVID-19 pandemic. The global fintech market is predicted to reach $608.35 billion by 2029, expanding at a CAGR of more than 14% during the forecast period (2024-2029).
Block, Inc. (SQ) has positioned itself comfortably in the fintech industry. With Square, Cash App, TIDAL, and TBD, the company builds tools to help people access the economy. Since its launch, Cash App, where one can buy, hold, withdraw, or sell bitcoin, has had more than 21 million actives.
However, Federal prosecutors are probing financial transactions at SQ, including Cash App and Square. The former employee provided prosecutors from the Southern District of New York with documents alleging that Square and Cash App lack sufficient customer data for risk assessment and that the company has processed multiple cryptocurrency transactions for terrorist groups.
For the first quarter of 2024, SQ reported net revenue of $5.96 billion, surpassing analysts’ estimate of $5.82 billion. Revenue from its Cash App was a record $4.17 billion during the quarter, up 23% year-over-year. Furthermore, the company’s non-GAAP net income per share came in at $0.85, compared to the consensus estimate of $0.73.
In its earnings release, the company stated that it will invest 10% of its “gross profit from bitcoin products into bitcoin purchases.”
Furthermore, SQ expressed confidence in its growth prospects by increasing its fiscal year 2024 guidance. The company expects full-year core earnings to be at least $2.76 billion, higher than its prior forecast of $2.63 billion.
Shares of SQ have gained 2.5% over the past year to close the last trading session at $63.29. However, the stock has plunged 4.2% over the past month and 19.1% over the past six months.
Let’s look at factors that could influence SQ’s performance in the upcoming months.
Robust Financial Performance
For the first quarter that ended March 31, 2024, SQ’s net revenue increased 19.4% year-over-year to $5.96 billion. Bitcoin revenue came in at $2.73 billion, up 26.2% year-over-year. Its gross profit rose 22.2% from the year-ago value to $2.09 billion. Cash App’s gross profit was $1.26 billion, up 25% year-over-year, and Square’s gross profit was $820 million, up 19% year-over-year.
Additionally, the company’s adjusted EBITDA rose 91.6% from the year-ago value to $705 million. Its net income attributable to common stockholders grew 380.1% year-over-year to $472.01 million. Also, the company’s net income per share was $0.74, an increase of 362.5% from the previous year’s quarter.
As of March 31, 2024, Block’s cash and cash equivalents stood at $5.75 billion, compared to $5 billion as of December 31, 2023. However, the company’s current liabilities increased to $12.50 billion as of March 31, 2024, versus $9.92 billion as of December 31, 2023.
Favorable Analyst Expectations
Analysts expect SQ’s revenue for the second quarter (ending June 2024) to grow 13.5% year-over-year to $6.28 billion. The consensus EPS estimate of $0.84 for the current quarter indicates a 115.6% year-over-year increase. Moreover, the company has surpassed the consensus revenue estimates in each of the trailing four quarters, which is impressive.
For the fiscal year ending December 2024, Street expects SQ’s revenue and EPS to grow 14.5% and 89% from the prior year to $25.10 billion and $3.40, respectively. In addition, the company’s revenue and EPS for the fiscal year 2025 are expected to increase 11.7% and 27.7% year-over-year to $28.02 billion and $4.35, respectively.
Mixed Profitability
SQ’s trailing-12-month asset turnover ratio of 0.68x is 216.4% higher than the industry average of 0.22x. However, its trailing-12-month gross profit margin of 34.77% is 41.7% lower than the 59.68% industry average. Likewise, the stock’s trailing-12-month EBIT margin of 0.77% is 96.7% lower than the 23.45% industry average.
Further, the stock’s trailing-12-month net income margin of 1.68% is significantly lower than the 23.03% industry average. Its trailing-12-month ROCE and ROTC of 2.11% and 0.46% are unfavorably compared to industry averages of 10.60% and 6.84%, respectively.
Mixed Valuation
In terms of forward non-GAAP PEG, SQ is trading at 0.46x, 59.7% lower than the industry average of 1.13x. The stock’s forward EV/Sales multiple of 1.53 is 50.4% lower than the industry average of 3.08. However, its forward EV/EBIT of 37.83x is 248.4% higher than the industry average of 10.86x.
Also, the stock’s forward Price/Book multiple of 1.93 is 85.8% higher than the industry average of 1.04. Its forward EV/EBITDA of 13.75x is 39.1% higher than the industry average of 9.89x.
POWR Ratings Reflect Uncertainty
SQ’s mixed fundamentals are reflected in its POWR Ratings. The stock has an overall rating of C, which translates to Neutral in our proprietary rating system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. SQ has a C grade for Quality and Value, in sync with its higher-than-industry profitability and lower-than-industry valuation, respectively.
Further, SQ has a grade C for Stability, justified by its 24-month beta of 2.59.
Within the Financial Services (Enterprise) industry, SQ is ranked #49 out of 93 stocks.
Beyond what I have stated above, we have also given SQ grades for Momentum, Growth, and Sentiment. Get all SQ ratings here.
Bottom Line
SQ surpassed analyst estimates on the top and bottom lines in the last reported quarter. The company significantly benefited from a robust labor market and wage growth that allowed Americans to set aside concerns of an economic slowdown and continue spending on travel, shopping, and dining out.
The company’s top strategic priority is increasing engagement of banking products with its existing Cash App transacting actives. However, Federal prosecutors are examining financial transactions at the company’s main units, Square and Cash App. Also, Block’s ecosystem and banking ambitions may face intense competition from established banks.
Given SQ’s decelerating profitability, elevated valuation, regulatory issues, and intense competition, waiting for a better entry point in this stock seems wise now.
How Does Block, Inc. (SQ) Stack Up Against Its Peers?
Given its near-term uncertain prospects, the odds of SQ outperforming in the weeks and months ahead are compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these three A (Strong Buy) or B (Buy) stocks from the Financial Services (Enterprise) industry instead:
CPI Card Group Inc. (PMTS)
Manhattan Bridge Capital, Inc. (LOAN)
Consumer Portfolio Services, Inc. (CPSS)
To explore more A or B-rated fintech stocks, click here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
SQ shares rose $0.04 (+0.06%) in premarket trading Thursday. Year-to-date, SQ has declined -18.13%, versus a 15.49% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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