Financial technology and payments platform company Block (NYSE:SQ) is showing signs that a recovery is underway, having gained over 10% in the first few days of January 2023 and 39% in the past three months. At its current price near $72, it’s far from its high of almost $290 seen in 2021. Given that it is trading at a highly-discounted valuation, the stock likely makes a good investment choice, and it may reward investors in the long term.
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Looking back, the pandemic triggered demand for the company’s offerings, which drove the stock to its all-time high. However, with tightening monetary policies aimed at combatting rising inflation along with an uncertain macro environment, the stock was battered. SQ took a further beating due to its exposure to crypto. It’s important to note, however, that Block’s crypto business does not have a meaningful contribution to its profitability.
Block, Inc. has two main reportable segments: Square and Cash App. Square offers business merchants a unified commerce ecosystem that helps them start, run, and grow their businesses by enabling sellers to accept card payments and provide other services. Cash App offers consumers an impressive ecosystem for payments.
The company is significantly boosting both its business segments, foreseeing a huge untapped total addressable market.
Block’s Long-Term Growth Driver: Cash App
Cash App is one of the biggest growth drivers for the company. It’s a one-stop financial service solution for all customers’ needs.
As a matter of fact, Cash App is an entire ecosystem of financial products, services, and tools that allow individuals to store, send, receive, spend, borrow and invest their money from a single mobile platform. Further, consumers are able to finance their purchases through its Afterpay buy-now-pay-later (BNPL) service. Due to the vast array of services provided, Cash App is becoming the most preferred digital wallet in the U.S., ahead of its peers like PayPal Holdings (NASDAQ:PYPL) and Venmo (owned by PayPal).
Notably, Cash App’s contribution to Block’s revenues and gross profits have grown tremendously. In Q3, the Cash App segment had revenues of $2.68 billion, growing 11.7% year-over-year. This is in contrast to the declining overall Q3 revenues reported by the company. What’s even more impressive is that Cash App’s gross profits of $774 million leaped more than 50% year-over-year. This shows the strength of the Cash App business despite a tough macro environment.
Block’s acquisition of Afterpay from early 2022 is expected to further boost Cash App’s revenues. Afterpay will connect Cash App with a higher number of merchants, thereby driving increased sales for seller-focused products. Looking at Q4, its Afterpay BNPL platform is expected to be a good contributor to the Cash App segment as it especially enabled consumers with tight budgets to shop during the holiday season and pay later.
Importantly, Block plans to execute a significant expansion for Cash App as well as its Square ecosystem. The company is focused on advancing its automation and AI with both platforms. In addition, it will add more products and features that complement the current ones. This should enhance subscription-based revenue growth and increase user engagement, leading to substantial growth and profitability for the company in the coming years.
Block’s Valuation is Compelling
Currently, Block shares are selling at just 2.3 times sales. This is near an all-time low level for the company and is much lower than the five-year price-to-sales average of 7.4x.
Given that the company has been resilient despite a tough macro scenario and has robust growth prospects, I believe it deserves a higher valuation.
Looking at Block’s financial statements, I also like the hefty cash position it has on its balance sheet. Cash & cash equivalents stood at $8.3 billion at the end of September 2022.
Is SQ Stock a Buy, According to Analysts?
The Wall Street community is clearly optimistic about Block stock. Overall, the stock commands a Strong Buy consensus rating based on 19 Buys, four Holds, and one Sell. Block’s average price target of $87.59 implies 22.25% upside potential from current levels.
The Takeaway: Block Stock Looks Attractive
Block stock has already recovered significantly after a brutal drop in 2022. If the feared recession is more severe than expected, it may impact Block’s lesser affluent user base, negatively impacting the company. On the other hand, if the economy improves in 2023, the stock could attain higher highs. Whatever happens in the short run remains to be seen. Longer term, the stock remains attractive based on strong growth potential supported by solid cash generation.
