Block Stock Expected To Move Heavily In The Coming Weeks (NYSE:SQ)

So, everyone has watched as there was a massive reset in tech names. Without question, Block (NYSE:NYSE:SQ), formerly known as Square, is a real fintech powerhouse and this entire sector got smashed in the last month or so. The action in the space reminds us very much of what we saw in prolonged crashes like the dotcom bubble, or even the bear market that was the financial crisis in 2008-2009. Block’s share price had fallen from nearly $290 to just over $82 peak to trough in the last few months, which is good for a 70% plus fall, but looks like a near-term bottom has been put in.

In our last buy call on the stock, we were quite clear that the company is growing like wildfire, and was moving more into profitability. We put out a buy alert because shares actually became reasonably valued when they dipped under $100. As traders we had to pounce sub $100, good for a 30%-40% gain. That rapid-return was a bit of luck, but the buy reasoning was rooted in buying up an oversold stock in ‘tech value’ territory as we like to say. Further, a high degree of short interest covering helped move the stock in the last week or two.

Make no mistake, we think the stock climbs back toward that $200 level this year. We think the stock, while trading a bit more calmly, is set to have a very volatile move either back to this near $200 level, or back to test lows. We think the latter will need some more market nervousness, while the former will need to see some bullish catalysts like the end of the war in Ukraine peacefully. Right now the stock has corrected, but is now looking for direction, and it is not going to be sideways in our opinion. Block’s most recently reported numbers show the company remains operationally sound, despite the market giving it a major haircut (even after the bounce). We expect the stock to move sharply, taking cues from the macro situation.

Block’s Q4 top and bottom lines

The company continues to see significant expansion. In Q4, revenue was $4.08 billion and this was up a solid 29% year-over-year. Further, we need to reiterate that this was a beat versus consensus estimates. All lines of business are performing well and overall, gross profit was $1.18 billion, which was up 47% year-over-year. Further, transaction revenue grew.

Revenues from transactions grow and these volumes are key

It is really important to note that revenue from transactions was $1.31 billion rising 41% year-over-year, while gross profit was $545 million, up 39% from the year ago quarter. These numbers show the strength of the expansion the company has enjoyed. Transaction volume is critical folks. Critical. That said, volumes were better than expected, surging from a year ago. Square processed $46.3 billion in GPV up 45% year-over-year. Services-based revenue increased to $772 million while gross profit was $622 million, up 63% year-over-year. Very solid. With a hot economy, we expect ongoing strength.

Crypto and Cash App continue to go strong

Cash App which has driven so much growth for Block over the years. Cash App generated $2.55 billion of revenue in Q4 and $518 million of gross profit. This was a big increase from last year. It’s worth noting that the price of Bitcoin was a bit weak in Q4. The volatility helps with trading revenue, but the company has a good amount of exposure to Bitcoin on its balance sheet. As Block owns a lot of Bitcoin, the stock to continue trades with a mild correlation with the price of bitcoin. However, the bulk of the business is still transaction based, and small business is back too. Retention remains strong and frankly it is regular active customers that are driving transaction revenues. And with small business no longer reeling from COVID, they are contributing heavily again to Block’s revenues. In fact, small businesses, through the Square ecosystem, were responsible for $1.47 billion of revenue and $657 million of gross profit, both up over 49% and 54% from a year ago, respectively. Once again, solid growth.

SQ stock will violently rally if the company really turns profitable

These high revenue growth, little to no earnings names have been crushed of late with the pending rate hike cycle, and market selloff. For Block, revenue is clearly in growth mode and the company is actually earnings positive. But it really needs to expand earnings for valuation to improve. The stock has fallen tremendously, which artificially improved valuation, and made it a buy. But margins, and of course expenses, are key to watch. While gross profit is solid, operating expenses are very high, and they even rose this quarter. The rose so much the degree of increase outpaced the revenue gains. Operating expenses were $1.24 billion, rising 63% year-over-year and this led to net losses in the quarter. Net loss was $77 million, while EPS was a loss of $0.15. For the year, the company saw net income of $0.44 per share. This puts the stock at some 300X trailing earnings. What about as we look ahead?

Looking ahead

As we look ahead to the year, we expect $1.00-$2.00 in EPS; this puts the stock at a still pricey but much more reasonable 130 to 65X FWD EPS. Yes it is still pricey, but if bitcoin takes off, so will the stock. Small business is back. Other valuation metrics suggest the stock remains attractive at $130, like the 2.9X price to sales. The company will grow much larger in the next two years as long as the economy does not go into recession. While some see this as possible, we are in the strong economy camp. We believe shares are a buy here.