It’s remarkable that a stock like Block (SQ) could fall by around 69% from its peak and still not be considered cheap to the value-conscious crowd. There’s no question that the valuation reset has been horrific for SQ shareholders. Jack Dorsey’s fintech firm may stand to be disrupted on the Point-of-Sale (PoS) payments side of the business, but Dorsey’s blockchain and Bitcoin (BTC) ambitions remain exciting.
With rates on the rise, though, excitement in a forward-looking growth story simply is not enough to cut it. Focus on earnings in the medium-term is of growing importance, and firms that don’t show solid earnings growth will likely be punished accordingly. On that front, SQ stock could still have more room to the downside, given its high price-to-earnings (P/E) multiple.
The low price-to-sales (P/S) multiple on SQ may indicate value. However, just how much are investors willing to pay for mostly sales growth in a rising-rate environment? I suspect we’ll find out when the stock settles over the coming quarters. For now, I’m staying on the sidelines and am mildly bearish.
Block Stock: What a Valuation Reset It’s Been
Stocks with valuations factoring in many years’ worth of high double-digit sales growth are no longer the most sought-after class of stocks.
Though stories of such growth companies shifting gears to become more profitable are encouraging and perhaps enough to put a bottom in some of the frothy revenue growers.
Companies like Salesforce (CRM), which has more of a focus on improving margins and medium-term profitability prospects, could be among the first of high-multiple growth stocks to put in a bottom in this horrendous Nasdaq sell-off.
As for companies like Square, which need to invest heavily to out-innovate a growing number of competitors, it’s tough to get behind them, even after such a disastrous and likely irrecoverable decline. Block is arguably one of the harder-to-value stocks right now, given the forward-looking nature of many intriguing innovations going on behind the scenes.
Indeed, a proposed decentralized finance service project with a name like “TBD54566975” is not only difficult for the average investor to understand, it’s really hard to gauge how the initiative will actually make money, how much money it will make, and when it expects to become profitable.
Little actual information has been released on the open developer platform and crypto-linked business, and it’s these speculative uncertainties that investors no longer care to pay a hefty premium for anymore.
At over 90 times trailing earnings, Block remains expensive. Recent market trends are no friend of Jack Dorsey’s empire, even if the man is ready to give the company his undivided attention.
Block Stock Can Rise Out of the Rubble, But it Could Take a While
There’s no question that Jack Dorsey is a true visionary.
That said, even visionaries like Jeff Bezos, can see their company’s share prices sag for many years before the real rewards set in. Amazon (AMZN) stock imploded during the dot-com bust, and it took many years before shares were able to rise out of the rubble. However, Amazon’s business metrics were actually on the right track despite the crash.
Indeed, Block stock could have more room to the downside as this “miniature” version of the dot-com bubble burst continues. Further, the company faces tremendous challenges ahead, with metrics that could face pressure over the coming quarters.
Most notably, Block’s Square business faces considerable competition that could impede its ability to expand upon margins. Square is a significant bill-payer of Block. The corporate name change represents a shift of focus, but an argument could be made that the firm, like Meta Platforms (FB), changed its company name prematurely.
Of course, I could be wrong, especially if the company’s blockchain projects like Spiral and TBD begin to excite investors on the profitability front. I believe that both projects should not even aim to become profitable to gain market share in a nascent tech industry that Dorsey believes could pay off down the road.
What About Block Stock’s Profitability Prospects?
Block seems to be gravitating away from massive profitability rather than towards it. As a result, its stock could stand to be punished further, as the company looks to spend on innovations to keep business sound over at Square.
If Square can adapt and thrive despite the increased competition in payments, I’ll be a fan of shares of Block. Until then, I’m not so sure the firm’s forward-looking projects will help SQ stock bottom out over the near term, at least not with rates on the rise.
Wall Street’s Take
According to TipRanks’ consensus analyst rating, SQ stock comes in as a Strong Buy. Out of 27 analyst ratings, there are 25 Buy and two Hold recommendations.
As for price targets, the average Block price target is $194.44, implying an upside of 62.28%. Analyst price targets range from a low of $135.00 per share to a high of $322.00.
The Bottom Line on SQ Stock
Square is arguably one of the most exciting stocks in payments, period. Arguably, it’s become even more attractive amid its decline. With so much shift towards actual earnings and valuation, it’s too hard to bottom-fish for the name, in my opinion. I’m uncomfortable with a company that faces stiff competition in an environment favoring a P/E of 396.4 over a P/S of 3.40.
That said, investing in Jack Dorsey could be a winning proposition over the long run. He’s shown signs in the past that he knows where the puck is headed next in the tech scene, whether it be social media or payments. Who knows? He may be putting himself in a spot to score a game-winning goal a few years from now.
Unfortunately, Dorsey’s believers’ patience and pain tolerance will continue to be put to the test.
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