Two years ago, Block, Inc. (NYSE: SQ) was on top of the technology world. E-commerce was booming. Seemingly every business in town was scrambling to establish an online presence to win over pandemic-restricted consumers. Profits soared, as did Block’s share price, to a record $289.23.
Since then, the payment solutions provider has struggled to adapt to an economic normalization befuddling Paypal and other industry challengers. The latest setback, a 25% month-to-date plunge to $60.57, follows a second-quarter earnings report that the market loathed — but that flashed signs of improvement.
Block's August 3rd release revealed that Q2 revenue jumped 26% year-over-year to $5.5 billion. Along with increases in both subscription and transaction-based sales, renewed Bitcoin trading activity drove the consensus-topping result. The company also beat on earnings per share (EPS) which more than doubled for the second straight quarter.
Considering 1) smaller merchants comprise the bulk of the payment processing base and 2) inflation continued to impact consumer spending, the numbers were actually quite impressive.
Block is making strides on the road to recovery while its stock stumbles. Here are five more reasons why it has become an attractive ‘buy-the-dip’ play.
#1 - Pumping the Brakes Is Proving Effective
In addition to the double beat, management raised its 2023 EBITDA guidance from $1.36 billion to $1.5 billion, which represents 40% profit growth from last year. This can largely be attributed to a slowdown in spending that is better late than never. Block’s decision to pare back technology investments, marketing and hiring is bearing fruit, with payment volumes on the upswing. The upbeat outlook signals confidence from the leadership team about improving profitability ahead.
#2 - Secular Tailwinds Remain Intact
Wall Street's financial projections for the next four quarters imply consistent sequential and year-over-year EPS growth. Block is expected to return to 2021 EPS levels this year, which would effectively create a springboard for ‘fresh’ growth in the post-Covid economy. Analysts' forecasts for 2024 point to 41% profit growth.
The brighter outlook stems from shifting global payment trends that took root well before the pandemic. Cash and checks continue to get phased out in favor of digital payments, a process that is still in the early stages in many foreign markets. A tap of the phone to activate a card payment is perceived as safer and more convenient.
Rewards programs are an added incentive. The proliferation of smartphones and the spread of 5G internet access are ushering in the era of mobile payments.
Block's strong foothold in this space should make it a go-to payment solution for merchants for years to come. If payment volumes are rising in today's inflation-riddled, high-interest-rate environment, they should only get better as these pressures moderate. Discretionary spending and average ticket size trend higher in a healthier global economy.
#3 - SQ Is Undervalued
Based on the consensus EPS estimate for 2024, Block is trading at 25x earnings. With EPS growth expected to be 41% next year, there is a significant disconnect between the company's growth profile and its stock valuation.
Looking at it from a different angle, SQ has a forward PEG ratio (P/E ratio divided by earnings growth) of just 0.61. A PEG ratio below 1.00 often indicates that a stock is undervalued.
#4 - Wall Street Bulls Are Stampeding
Since the Q2 earnings release, Wall Street sentiment has been predominantly bullish. Nine firms have reiterated buy ratings, and two have stuck with holds. One of the two holds, Morgan Stanley, has a $69.00 price target — showing even the cautious are bullish at current levels.
Several analysts raised their targets after the report, which brought the consensus target up to around $87.00. This implies more than 40% upside over the next 12 months. It's no coincidence that Block's projected return matches management's profit growth outlook. If it can deliver on this target, the market will have some catching up to do.
#5 - Technicals Are Bullish Too
The post-earnings downturn, while harsh, has come in light volume. Not that many shareholders have bailed (and importantly, not many ‘smart money’ institutional investors), which gives less credibility to the dip. And considering SQ recovered nicely from a high volume selloff in March 2023, a recovery from this month's selloff should be a piece of cake.
On the daily chart, a relative strength indicator (RSI) reading of 21 also suggests oversold conditions. This puts SQ in the bottom decile among Russell 1000 stocks, a good group to look at for bargains.
Bottom line: improving fundamentals, long-term tailwinds and a cheap valuation make Block worth a swipe at current levels.
