Block Isn’t Going Anywhere
[Block, Inc.(SQ)](/symbol/SQ?source=content_type%3Areact%7Csection%3Amain_content%7Csection_asset%3Ameta%7Cfirst_level_url%3Aarticle%7Csymbol%3ASQ) (/symbol/BTC-USD?source=content_type%3Areact%7Csection%3Amain_content%7Csection_asset%3Ameta%7Cfirst_level_url%3Aarticle%7Csymbol%3ABTC-USD)
Summary
– Block, Inc.Q4 earnings were mixed.
– The company still loses money on a GAAP basis but is seeing adjusted profitability.
– Business lines are performing well.
– SQ stock is pretty expensive here, but may have momentum.
– The company has got to get operating expenses under control.
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Block, Inc.(NYSE:
SQ) stock was crushed in 2022.The market had a roaring comeback to start 2023, and SQ stock was certainly a beneficiary.Folks, the company is not going anywhere.The association with Bitcoin ( BTC-USD) led to some severe pain as Bitcoin fell off the map.
Well, it’s up off the map, and that has helped.
But Block, Inc.is a services company, and a fintech.It helps people and businesses, and it is in growth mode.Of course, we have a horrific macro situation brewing, as you have a Fed raising rates to slow the economy on purpose.We still have rampant inflation.We expect to have a consumer that tightens their belts in coming months as the rate hikes have their effects.To be honest, we worry about small business to a degree as well, because they will feel the pinch of higher borrowing costs and a crimped consumer.
Long term, we are believers in Block, but this remains an excellent trading stock, both long and short.
We have traded SQ in both directions.We are bullish at the $60 area, here in the high $70’s we are mildly bullish.
With volatility back in the market you can still do well with a buy-write strategy, or by selling puts on the big downturns.With that said, lets discuss the Block, Inc.
reported quarterly earnings.
Block’s Q4 headline results
In Q4, revenue was $4.65 billion, and this was growth of 14.0% year-over-year.While revenue was up, it was expected to grow some from last year.That said, the 14.0% growth was a nice beat
versus consensus estimates of $60 million.On top of the growth in revenue, the company managed expenses, and as such it has seen improvement in profit.
The key? Well, all lines of business are still performing well, and overall, gross profit was $1.66 billion, which was up 40% year-over-year.
Transaction revenue grew markedly despite the macro pressure from rates.So far, the economy remains on fire.
Revenues from transactions grew in Q4
Revenue from transactions was $1.47 billion, rising 13% year-over-year, while gross profit was $605 million, up 10% year-over-year.This is solid growth, but astute investors will note that the pace of growth has slowed markedly from years past.
But these transaction metrics show that there is still a strong economy despite the Fed’s actions to slow activity.
Volumes were better than expected, surging from a year ago.Square processed $53.2 billion in GPV up 15% year-over-year, though down from Q3.Services-based revenue increased to $1.31 billion, jumping 69% from last year, and rising 4% from Q3.Further, gross profit was $1.07 billion, up 70% year-over-year.
Cash App Q4 results
In Q4, Cash App generated $2.86 billion of revenue and $848 million of gross profit.
This was one of the revenue sources that led to increases on the Block, Inc.top line.This $2.86 billion was a muted 12% increase from last year, and was up 6% from Q3.Gross profit rose 64%.
Bitcoin was volatile, again, in Q4.
Once again, volatility does help with trading revenue, but the company has a good amount of exposure to bitcoin on its
balance sheet as it owns a lot of bitcoin.Whether or not you agree with it, there is a bit of a correlation of Block share prices with the price of bitcoin.
Bitcoin was good for $1.83 billion in revenue.If you back out bitcoin and buy now, pay later (“BNPL”), Cash App revenue was up 41% to $892 million.
The buy now pay later platform is a relatively new addition, and that contributed another $132 million in revenue.
Profit power
For a long time, Block did not turn a profit.There are still concerns on a GAAP basis, but on an adjusted basis they make money.That said, many of the key metrics are doing well and expanding.There is high revenue growth, but still very little to no earnings, but earnings are improving.Block has to expand earnings for valuation to be really attractive.
But operating expenses continue to be higher than we would like.Here in Q4, operating expenses were $1.80 billion, rising 45% year-over-year, and rising from Q3’s $1.62 million.
These expenses are far outpacing gross profit growth and revenue growth, by and large.Once again, we mentioned that on a GAAP basis, the company has been mixed, and here in Q4 they lost money.
Net loss was $114 million, while EPS was a loss of $0.19.
The adjusted measures are a bit cleaner.Adjusted EBITDA widened from last year’s $233 million.It came in at a strong $284 million but was down sequentially.Adjusted EPS was $0.22, missing consensus by $0.08.
This was a result of those higher than expected expenses.So, overall, the stock is still around 70X earnings.Much less expensive than the heights of 2021-2022, but this is expensive.
Other
valuation metrics suggest Block, Inc.stock remains attractive.On a price to sales basis we are at 2.3, which is attractive, and the price to book is 2.6, which is also pretty attractive.The EV/sales is also relatively attractive at 2.6, but ultimately, we need earnings to grow.
Looking ahead for Block
As we look ahead to the full year 2023, we now expect $1.25-2.00 in EPS; this puts Block, Inc.stock at a still pricey but more reasonable ~46X FWD EPS at the midpoint, but that is not cheap.We think the stock can rally further if we get a big bitcoin bump.
We expect revenue growth continues, but the reason we see EPS improving lies in the operating expenses.
Discussion of expenses in the shareholder letter the last few quarters seems to indicate the company is aware of the spending and profit issues.That remains to be seen.
While the macro situation is uncertain, at best, small business is still doing well, and transaction volume is going up.We need to see expenses better controlled to see earnings expand more, but these results and the outlook suggest Block, Inc.is back to its growing ways.Better days are ahead, and we think the stock can make a run from this level.We rate Block, Inc.a mild buy here, and a much better buy should it pull back.
So what do you think?
Whether you are one of our successful traders in our membership service or a casual reader of Seeking Alpha, we would love to hear from you.Do you think Block has put in its bottom? Do you think bitcoin prices really matter for the stock? Are you bearish? Do you think we see $100+ this month, or a retracement with the broader market? Let us know below.
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Disclosure: I/we have a beneficial long position in the shares of SQ either through stock ownership, options, or other derivatives.I wrote this article myself, and it expresses my own opinions.I am not receiving compensation for it (other than from Seeking Alpha).I have no business relationship with any company whose stock is mentioned in this article..
