Shares of Square-owner and crypto firm Block (SQ) have been a major mover of late, with wild swings on the daily.
Shares of SQ blasted off around 40% in just a few trading sessions on the back of a brilliant fourth quarter that saw a 29.1% growth in sales year-over-year and $0.27 in per-share earnings, topping the average analyst consensus that called for $0.22. Cash App saw a stellar 45% in a year-over-year jump in gross payment volumes—a remarkably strong number, while Square posted a jaw-dropping 49% in year-over-year growth.
Undoubtedly, Block stock had been viciously oversold and due for a bounce. With shares back on the retreat, it may still be too soon to conclude the choppy stock has hit bottom. While the Q4 numbers were magnificent, the long-term future over at Block remains as cloudy as ever. I am bearish on the stock.
All About Cash App and Blockchain Projects as Rising Competition Goes for Square
For now, Block is all about Cash App and Square Payments. With the name change and focus on innovating within the arena of blockchain, it’s hard to know what to expect as the firm sets its target on its next innovative business.
Arguably, the “TBD” project and Spiral could evolve to become major revenue drivers in a few years down the road, or they may never become as influential as Block’s Cash App or Square businesses. It’s really hard to tell at this juncture.
In any case, I view such blockchain efforts as more akin to an “Other Bets” type of segment like the one praised by Alphabet (GOOG) investors. Such a moonshot bet could pave the way for incredible appreciation, especially if they’re not yet appreciated by Wall Street.
Simply put, Block is innovating, and it has a legend in Jack Dorsey running the show. With such a steep multiple, though, I wouldn’t chase the stock off its bounce from the ~$83 per share low.
I think the odds of a retest are high, and the recent quarter-induced bounce may just be a blip that accompanies further pressure. Higher expenditures on innovative blockchain projects and a still stretched valuation are major pressure points that could render the post-earnings rally short-lived.
Block: Disrupted and Disruptor at the Same Time?
Block is an innovator at heart, but like it or not, Square is going to have to play defense, as competition, most notably from Apple (AAPL) and its new, more innovative PoS offering, moves in.
Dorsey wants to be on the right side of innovative trends. That’s why his firm acquired Australian BNPL (Buy Now Pay Later) company Afterpay. The costs of integrating Afterpay alongside Cash App and Square will not come cheap. Expenses are already poised to rise, and that alone could cause investors to lose interest, even as top-line growth reaccelerates.
Afterpay was a great play for Block to acquire its way on the right side of a disruptive trend in payments. However, I’m not so sure what Dorsey’s plans will be should Apple choose to incorporate its own installments-based payments service alongside its “Tap to Pay” feature, which seems superior to Square’s offering.
Afterpay Integration Improves Block’s Payments Ecosystem
Dorsey believes Afterpay will be core to Block’s ecosystem, and it’s a very good ecosystem for now. Is it an impenetrable ecosystem, though? With Apple hungry for a greater slice of the payments pie, I’d argue that it’s not. Like it or not, Block stands out to me as more of a “disrupted” firm rather than a disruptor.
Stacked up against rivals in payments, Block seems like a decent performer. With Apple and its powerful network effects, I think Block could be in for a serious margin squeeze. Apple can afford to drive fees to the floor, as it looks to encourage its users, whether they be on the buy or sell side, to make healthy financial decisions.
Wall Street’s Take
Turning to Wall Street, SQ stock comes in as a Strong Buy. Out of 29 analyst ratings, there are 26 Buys and three Hold recommendations.
The average Block price target is $188.61, implying an upside potential of 88.1%. Analyst price targets range from a low of $135.00 per share to a high of $272.00 per share.
The Bottom Line
Had it not been for Apple’s “Tap to Pay” iPhone feature, I’d be bullish on SQ stock. I think Apple is a dangerous rival that could hurt Square and cut its growth short at some point over the next three years. If Apple were to jump on the BNPL bandwagon (I think it could), I wouldn’t be surprised if Block stock were to fall by another 60%.
For now, adding functionality to Cash App while doubling down on blockchain and crypto projects seems like the way to go. How efforts of the latter will generate a meaningful profit remains unclear. That’s why I wouldn’t personally go fishing for a bottom in the stock as competition in payments gets more fierce.
Upon first glance, SQ stock looks like an oversold bargain, perhaps even a “steal” at 3.3 times sales.
Given the magnitude of sales decay that could be in the cards at the hands of disruptors like Apple, though, I’d argue that SQ stock is not as cheap as it seems. With expenditures to add up on blockchain projects, I’d also look for the price-to-earnings multiple to stay in the triple digits for longer.
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