Block (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.
Despite losing 54.9% over the past year, the stock is currently trading above its 50-day moving average of $63.48.
Moreover, with the odds of the Fed ultimately increasing benchmark interest rates significantly above expectation increasing with every release of economic data, an end to current economic uncertainties doesn’t seem to be in sight.
Let’s closely examine if the fundamentals make SQ worthy of investment.
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.
Bleak Analyst Estimates
Analysts expect SQ’s revenue for the fiscal year (ended December 2022) to decrease 1.1% year-over-year to $17.47 billion. The company’s EPS for the current year is expected to decline 36.1% year-over-year to $1.09.
In terms of forward non-GAAP Price/Earnings, the stock is trading at 59.21x, 224.4% higher than the industry average of 18.26x. Likewise, its forward EV/EBITDA and Price/Cash Flow multiples of 42.64 and 44.07 compare unfavorably with the industry averages of 12.42 and 17.22, respectively.
Despite the recent drawdown in market capitalization, SQ’s high valuation entails risks of further downside for the stock.
Lackluster Profitability and Inefficient Asset Utilization
SQ’s trailing 12-month gross profit margin of 32.72% is 33.9% lower than the industry average of 49.53%. The stock has trailing 12-month EBITDA and net income margins of negative 0.70% and negative 2.97%, compared to the industry averages of 11.74% and 3.25%, respectively.
SQ’s negative trailing 12-month ROCE, ROTC, and ROTA compare to the industry averages of 5%, 3.24%, and 1.52%, respectively.
POWR Ratings Reflect Fundamental Weakness
SQ’s overall D rating translates to a Sell in our POWR Ratings system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
Our proprietary rating system also evaluates each stock based on eight distinct categories. SQ also has a D grade for Stability, Momentum, and Quality due to its high beta of 2.37, the downtrend in price, and poor profitability, respectively.
Unsurprisingly, SQ is ranked #80 of 101 stocks in the Financial Services (Enterprise) industry.
Click here to see additional POWR Ratings for Growth, Value, and Sentiment for SQ.
Given that the Fed might go further than expected with its rate hikes, increasing borrowing costs and reducing discretionary expenditure could put further pressure on the company’s already compressed margins. The near-term outlook does not seem encouraging for SQ.
Moreover, the company’s foray into Buy Now Pay Later (BNPL) with Afterpay in Canada and Clearpay in the UK is a risky bet, 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.
Moreover, given SQ’s weak financials, poor profitability, stretched valuation, and high stock price volatility, it could be wise to avoid this financial services stock for now.
How Does Block, Inc. (SQ) Stack up Against Its Peers?
SQ has been rated D, equating to a Sell. You may check out these other stocks within the Financial Services (Enterprise) industry with an A (Strong Buy) or B (Buy) rating: MGIC Investment Corporation (MTG), Forrester Research, Inc. (FORR), and South Plains Financial, Inc. (SPFI).
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SQ shares were trading at $68.84 per share on Friday afternoon, up $4.13 (+6.38%). Year-to-date, SQ has gained 9.55%, versus a 1.69% 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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