In this article, I have evaluated renowned financial stocks, Block, Inc. (SQ) and Morningstar, Inc. (MORN), to determine which has the potential for long-term growth.
The Federal Reserve's substantial increase in interest rates, reaching levels not seen in 22 years, aims to address economic growth and inflation concerns. This move benefits the financial sector by potentially increasing profit margins and investment income.
Moreover, the United States experienced robust growth and subdued inflation last year, defying earlier recession forecasts and banking sector concerns. Strong consumer spending and a robust labor market drove GDP growth to 3.3% in the final quarter of 2023, surpassing Wall Street estimates.
In addition, the financial services market is poised for growth, fuelled by factors such as expanding wealth, demand for alternative investments, blockchain adoption, and increased individual investor activity. Besides, online financial services are in high demand post-pandemic, aided by the proliferation of internet and mobile technology.
Fintech has rapidly grown and is further expected to reach $608.35 billion by 2029, expanding at a CAGR of over 14%.
MORN is a clear winner in terms of price performance, with 65.4% returns over the past year, compared to SQ’s 23.4% decline. MORN has gained 50.9% over the past nine months, while SQ gained 30.8%.
Here are the reasons why we think MORN could perform better in the near term:
Latest Developments
On March 13, 2024, SQ’s wholly-owned Afterpay expanded its merchant partnerships, offering younger consumers the option to manage their spending through its flexible financial platform. This move aims to cater to the growing demand for responsible spending among Gen Z and Millennials.
Conversely, on January 17, MORN and iCapital joined forces to integrate alternative investments and analytics into MORN's Advisor Workstation platform. This collaboration aims to provide over 170,000 users with tools to assess private assets alongside traditional investments, enabling advisors to offer more diversified portfolios and meet clients' evolving needs for personalized investment strategies.
The integration promises an end-to-end solution, allowing advisors to incorporate alternatives into model portfolios, reports, and proposals seamlessly.
Recent Financial Results
In the fiscal year ended December 2023, SQ reported total net revenue of $21.92 billion, up 25% year-over-year. However, its operating expenses rose 17.6% from the previous year to $7.50 billion. Its operating loss stood at $29.14 million.
On the other side, MORN’s revenue increased 9% year-over-year to $2.04 billion in the fiscal year ended December 2023. Its adjusted operating income rose 9.2% from the previous year to $326.50 million. Moreover, adjusted net income per share grew 32.3% year-over-year to $5.12. The company’s free cash flow improved 17.2% year-over-year to $197.30 million.
Past And Expected Financial Performance
SQ’s revenue has grown at a CAGR of 32.1% over the past three years. However, its net income and EPS declined at a CAGR of 64.2% and 66.9% over the past three years.
Analysts expect SQ’s revenue is likely to rise 16.5% in the current quarter and 14% over the past year. Its EPS is expected to grow 85.1% in the current quarter and 84.2% in the current year.
In contrast, MORN’s revenue has grown at a CAGR of 13.6% over the past three years. Street expects its EPS and revenue to rise 30.1% and 13%, respectively, this year.
Profitability
MORN is more profitable, with a trailing-12-month gross profit margin of 58.62% compared to SQ’s 34.58%. MORN’s trailing-12-month EBIT and EBITDA margins of 11.31% and 16.40% are higher than SQ’s negative 0.67% and negative 0.86%, respectively.
Valuation
In terms of trailing-12-month EV/Sales, MORN’s 6.06x is higher than SQ’s 2.11x. MORN’s trailing-12-month P/S multiple of 5.73 is also higher than SQ’s 2.12.
Thus, SQ is relatively more affordable.
POWR Ratings
SQ has an overall rating of C, which equates to a Neutral in our proprietary POWR Ratings system. Conversely, MORN has an overall rating of B, which translates to a Buy. The POWR Ratings are calculated considering 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 and MORN have an A and B grade, respectively, for Sentiment, which is in sync with their favourable analysts’ estimates.
Moreover, SQ has a D grade for Quality. Its trailing-12-month gross profit margin of 34.58% is 41.6% lower than the industry average of 59.20%. Its trailing-12-month CAPEX/Sales of 0.69% is 66.6% lower than the 2.07% industry average.
But MORN has a C grade for Quality. While MORN’s trailing-12-month gross profit margin of 58.62% is marginally lower than the industry average of 59.20%, its trailing-12-month CAPEX/Sales of 5.84% is 182.9% higher than the industry average of 2.07%.
Of the 101 stocks in the Financial Services (Enterprise) industry, SQ is ranked #60, while MORN is ranked #8.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Momentum, Stability, and Value. Click here to view SQ ratings. Get all MORN ratings here.
The Winner
The financial services industry is poised for long-term growth due to increased corporate demand and the adoption of digital technologies. Moreover, the Fed's recent high-interest rate stance has supported the industry, while potential future rate cuts may stimulate borrowing and investment.
Financial services providers SQ and MORN are poised to reap the rewards of the industry's favorable conditions.
However, SQ’s relatively weak financials, low profitability, and mixed growth outlook make MORN the better buy for long-term growth.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Financial Services (Enterprise) industry 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.
MORN shares were trading at $309.72 per share on Thursday afternoon, up $1.03 (+0.33%). Year-to-date, MORN has gained 8.36%, versus a 8.07% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
The post Block Inc. (SQ) vs. Morningstar (MORN) - Which Financial Stock Has Long-Term Growth Potential? appeared first on StockNews.com