I am bullish on Block, Inc. (SQ) as it enjoys substantial competitive advantages and its price target implies strong total return potential, while Wall Street analysts are overwhelmingly bullish on it.
Block, Inc. – commonly referred to by its original name, “Square” – has grown into a fintech giant that provides an integrated ecosystem of commercial solutions, banking services, and business software. Originally a payment platform, Square was mostly aimed at the SME market and helping sellers run their business with a suite of ecommerce solutions. Today, Square enables entrepreneurs to effortlessly accept chip cards and NFC payments.
PayPal is Block’s primary competition in the market. Square provides more robust business tools such as employee management for businesses, compared to PayPal, which is limited to payments only. Even after its corporate rebranding, Square, now named Block, continues to inspire investor confidence.
Block’s Strengths
Block is the leading provider of financial solutions in the SME market. Its competition with Paypal is still heating up in 2022, as they continue to improve their digital wallets. Square also aims to help individuals manage money with its Cash App.
Former CEO Jack Dorsey had tweeted that the company will focus on creating a new line of financial products focused on the Bitcoin blockchain. This, he hopes, will make the network more secure and scalable. Square invested nearly $170 million in Bitcoin in early 2021 and $50 million in October 2020. However, its Bitcoin business hasn’t really taken off as the company predicted, bringing in only razor-thin profit margins.
Recent Results
According to Square’s Q3 FY 2021 earnings, the fintech giant drew revenue of $3.8 billion, falling short of its expected $4.4 billion. Moreover, Square managed a 43% year-over-year improvement in gross profit, due to its seller ecosystem. Its Q3 FY 2021 GPV stood at an impressive $45.4 billion, an improvement of 43.2% year-over-year.
The company’s total earnings for 2021 are in excess of $16 billion, a sizable increase from $9.5 billion in 2020. The stock value for SQ is around $118.10 after a bad six months, because performance is tied to the highly volatile Bitcoin. However, growth is poised to pick up soon.
Valuation Metrics
SQ stock looks attractively priced here as it trades well below its historical averages on both an enterprise value to EBITDA ratio and price to normalized earnings basis. Its enterprise value to EBITDA ratio is 60.68x compared to its historical average of 90.06x and its price to normalized earnings ratio is 74.63x compared to its historical average of 123.80x.
Wall Street’s Take
According to Wall Street analysts, SQ earns a Moderate Buy analyst consensus based on 17 Buy, six Hold, and zero Sell rating in the past three months. Additionally, the average SQ price target of $257.59 puts the upside potential at 118.1%.
Summary and Conclusions
Block is well-positioned as an innovator and disruptor across the financial services industry and has enjoyed rapid growth rates for quite some time. On top of that, Wall Street analysts are overwhelmingly bullish on the stock at its current price, and assign it an average price target that implies it could nearly double over the next year. There is good reason for that, as the valuation multiples currently stand at a steep discount to its historical averages.
While the prospect of rising interest rates does weigh on the appeal of a heavily growth-weighted investment like SQ stock, overall the risk-reward looks like it might be attractive here and investors may want to consider adding shares on the pullback.
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