The 7.7% year-over-year increase in October’s Consumer Price Index (CPI) had the markets breathing a sigh of relief yesterday in the hope of the Fed responding with a 50-bps rate hike in its December meeting. The indexes posted their biggest intraday gains in more than two years. The Dow surged 1200 points yesterday.
Since inflation is still far above the levels accepted by the Fed, the rate hikes are not expected to pause anytime soon. Additional rate hikes will only add to the misery of businesses already burdened by slowing down demand and high borrowing costs.
Given such macroeconomic uncertainties, investors it could be wise to get rid of fundamentally weak and beaten-down stocks Block, Inc. (SQ), Coinbase Global, Inc. (COIN), and Robinhood Markets, Inc. (HOOD), which look overvalued at their current price levels.
Block, Inc. (SQ)
SQ is a technology company that creates tools to enable businesses, sellers, and individuals to participate in the digital economy. The company operates through two segments: Square and Cash App.
On September 22, SQ announced that it would provide “Buy Now, Pay Later” (BNPL) functionality to sellers using SQ’s e-commerce products across Canada. This marks the company’s first integration with Afterpay in the country. BNPL is a risky bet for SQ, with Apple Inc. (AAPL) and Affirm Holdings, Inc. (AFRM) emerging as rivals in this space.
In addition, according to a report by UBS analyst Rayna Kumar, the “risk profile” of Afterpay has changed amid rising interest rates and the potential of increased regulation.
During the nine months of the fiscal year 2022 ended September 30, SQ’s total net revenue decreased 5.2% year-over-year to $12.88 billion. The company reported an operating loss of $489.35 million during the same period, compared to an operating income of $215.73 million during the prior-year period.
In addition, the company’s adjusted EBITDA declined 14.4% year-over-year to $710.06 million. It reported an adjusted net income of $478.85 million and $0.78 per share, down 14% and 26.4% year-over-year, respectively.
In terms of forward non-GAAP Price/Earnings, the stock is trading at 61.77x, 225.8% higher than the industry average of 18.96x. Likewise, its forward Price/Cash Flow multiple of 48.90 compares with the industry average of 17.16.
Analysts expect SQ’s revenue for the fiscal year (ending December 2022) to decrease 0.8% year-over-year to $17.52 billion. The company’s EPS for the current year is expected to decline 36.2% year-over-year to $1.09.
The stock has slumped 58.9% year-to-date to close the last trading session at $67.40.
SQ’s POWR Ratings are consistent with its uncertain prospects. The stock has an overall rating of D, equating to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
SQ also has a D grade for Stability, Momentum, and Quality. It is ranked #79 out of 106 stocks in the F-rated Financial Services (Enterprise) industry.
Click here to access additional ratings for SQ’s Growth, Value, and Sentiment.
Coinbase Global, Inc. (COIN)
COIN is a fintech company that provides end-to-end financial infrastructure and technology for the global crypto economy. The company offers financial accounts for retail crypto users, a liquid marketplace to institutions for crypto transactions, and technology and services for ecosystem partners.
Earlier today, it was revealed that COIN has laid off just over 60 people as the company continues to reevaluate its headcount amid the ongoing downturn in the industry. This is part of a broader cost-cutting plan announced in June, under which the company had decided to lay off 1,100 employees or 18% of its workforce at the time of the announcement.
On November 1, COIN filed a federal court for permission to file a friend-of-the-court (amicus) brief in the ongoing lawsuit between the U.S. Securities and Exchange Commission (SEC) and Ripple Labs. SEC sued Ripple at the end of 2020 on allegations that it sold XRP as an unregistered security.
COIN has argued that the SEC’s inconsistent enforcement approach creates “uncertainty” for companies in the sector.
On October 17, it was revealed that COIN is considering suing 1000 users in the republic of Georgia for taking advantage of a pricing glitch when the lari, the local currency, was priced at $290 rather than $2.90 for about six hours on COIN.
The above developments illustrate a longstanding concern of financial regulators regarding the risks posed to institutions by external partnerships and justifies the call for greater regulation which hurts the USP of decentralized finance and businesses built around it, such as COIN.
For the fiscal 2022 third quarter ended September 30, COIN’s total revenue decreased 55% year-over-year to $590.34 million due to a significant negative impact by stronger macroeconomic and crypto market headwinds and trading volume moving offshore. The company reported an operating loss of $556.48 million, compared to an income of $291.81 million in the prior-year period.
In addition, its adjusted EBITDA came in at negative $115.89 million, compared to $618.22 in the prior year’s period. COIN’s net loss attributable to common shareholders came in at $544.64 million and $2.43 per share, compared to a net income of $405.30 million and $1.62 per share in the year-ago period, respectively.
In terms of the forward Price/Sales, the stock is trading at 3.63x, 25.2% higher than the industry average of 2.90x. Also, its forward Price/Book of 2.17x is 66.4% higher than the 1.31x industry average.
Analysts expect COIN’s revenue for the fiscal year ending December 2022 to decline 59.4% year-over-year to $3.18 billion. Also, the company’s loss per share for the current year is expected to come in at $5.53, compared to an EPS of $17.10 in the previous year.
The stock has plunged 24% over the past month and 79.7% year-to-date to close the last trading session at $50.92.
It is no surprise that COIN has an overall rating of F, which translates to a Strong Sell in our POWR Ratings system. It also has a grade of F for Growth, Stability, and Sentiment and a D for Value, Momentum, and Quality.
The stock is ranked last among 143 stocks in the F-rated Software – Application industry.
Robinhood Markets, Inc. (HOOD)
HOOD is a financial services platform that allows users to invest in stocks, exchange-traded funds (ETFs), options, and cryptocurrencies. The company also offers learning and education solutions, which include Robinhood Snacks, Robinhood Learn, Newsfeeds, Robinhood lists and alerts, and First trade recommendations.
On August 8, 2022, HOOD announced its second round of layoffs this year, slashing 23% of its headcount by letting go of 800 employees, with marketing, operations, and product management functions of the firm being the most impacted. This move came amid a drop in revenue as its Monthly Active User (MAU) count dropped by 2 million and Assets Under Custody (AUC) dipped by 31%, both on a sequential basis.
HOOD cited a weak economic environment and depressed trading activity as major causes behind its decision to trim the workforce.
For the third quarter of fiscal 2022 ended September 30, HOOD’s net revenues declined 1.1% year-over-year to $361 million. The company reported a net quarterly loss of $175 million, translating to a loss per share of $0.20. Its total liabilities stood at $17.65 billion as of September 30, 2022, compared to $12.48 billion as of December 31, 2021.
Analysts expect HOOD’s revenue for fiscal 2022 to decline 24.4% year-over-year to $1.37 billion, while its EPS is expected to remain negative for fiscal 2022 and 2023.
The stock has slumped 13.7% over the past month and 49.7% year-to-date to close the last trading session at $9.27. Despite this decline, HOOD is currently trading at a forward Price/Sales multiple of 5.99, 106.3% higher than the industry average of 2.90.
HOOD’s bleak outlook is reflected in its overall D rating, equating to Sell in our POWR Ratings system. It has also been graded F for Stability and D for Value and Quality.
HOOD is ranked #113 of 143 stocks in the Software – Application industry.
Click here to access additional ratings for HOOD’s Growth, Momentum, and Sentiment.
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SQ shares were trading at $71.68 per share on Friday afternoon, up $4.28 (+6.35%). Year-to-date, SQ has declined -55.62%, versus a -15.23% rise in the benchmark S&P 500 index during the same period.
About the Author: Santanu Roy
Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities. More...
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