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Stock Analysis & Ideas

Block Stock: Still One of the Most Forward-Thinking Fintechs

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Block stock has fallen considerably off its high, and it recently released meager Q2 earnings results. Looking way ahead, though, Block remains one of the better ways to bet on the future of the blockchain.

Shares of fallen fintech darling Block (SQ), formerly known as Square, are starting to find their footing again amid the broader market rebound. Though its Q2 results were disappointing and were weighed down by weakness in bitcoin (BTC-USD), Block still seems like one of the most intriguing ways to play the future of finance.

At $87 and change per share, I am bullish on SQ stock at this juncture. The stock is down 70% from its high, leaving mostly low expectations ahead of its coming quarters.

Block Stock’s Change of Face is Still Tough to Understand

Indeed, Block is a rather misunderstood firm that’s facing a bit of an identity crisis. Name changes and a focus on distant growth initiatives seems to be the trend for fallen tech stocks that lost their way these days. CEO Mark Zuckerberg shocked the world when he renamed Facebook to Meta Platforms (META). Unlike Meta, though, Block’s pivot is tougher to comprehend, given the abstract nature of the crypto-related projects it’s working on.

With Dorsey jumping aboard the name-change bandwagon, with a face-lift that saw Square become Block (a play on the firm’s blockchain and bitcoin focus), many investors and analysts are likely scratching their heads over where Block sees itself in 10 years.

Just as the metaverse, or virtual-reality-based worlds of the future, could be the next frontier for digital ads, the blockchain seems to be the next step in payments.

Bitcoin boomed in 2020 and 2021, only to go bust in 2022 along with shares of Block. However, as interest in cryptocurrencies, NFTs (Non-Fungible Tokens), and blockchain fade away, questions linger as to whether Block will continue swimming forward with its crypto focus or take it easy amid what’s shaping up to be a nasty “crypto winter.”

Dorsey’s passion is bitcoin and blockchain, and I do think Block is one of the most prudent ways to play the future of cryptocurrencies and related technologies. Investing in cryptocurrencies or their miners is a dangerous game that could result in swift losses.

Though Block has some exposure to the price of bitcoin, it’s the developments beneath the hood that may be critical to the future of crypto infrastructure. Such efforts may not help Block pay the bills in an era of rising rates. However, the firm does have wonderful payment platforms in Cash App and Square Payments that could help the firm fund its higher-risk/higher-reward projects.

Block’s Mysterious Long-Term Blockchain Projects are Interesting

Unlike the metaverse, which could pull in billions in revenue once it goes mainstream, it remains challenging to envision how Block’s crypto-focused TBD or Spiral projects will make money. With buzz terms like “Web3” being thrown around in the crypto universe, the future of blockchain technology remains a complete mystery for those who aren’t well-versed in the subject.

Dorsey is a big believer in the applications of the blockchain. However, he’s not buying the hype surrounding web3 — a decentralized form of the web that some crypto fanatics see replacing the current state of the web.

In any case, I think Block’s mysterious crypto and blockchain projects make SQ stock a more exciting play than the likes of PayPal (PYPL), which seems more focused on digital payments and grabbing the lower-hanging fruit. However, just because PayPal isn’t looking way ahead into the future doesn’t mean it’s an inferior bet.

There’s a real risk that Block is looking way too far into the future with its crypto focus. If its crypto and blockchain projects don’t bear fruit in a rising-rate environment, the stock may underperform the more-present-thinking PayPal over the next few years.

For now, forward-thinking innovation investor Cathie Wood prefers Block over PayPal, primarily due to Dorsey’s passion for crypto. It is noteworthy that PayPal does have a toe in the crypto waters. However, it may be more inclined to take a wait-and-see approach before diving into a nascent field head-first. Arguably, PayPal’s strategy is more prudent, especially now that investors value improving profitability above all else.

Between PayPal and Block, I’d have to side with PayPal, as having one’s sights set too far into the future can have an undesirable impact on a stock. For now, I view Block as more of a “Meta Platforms” of fintech in that it has reliable businesses like Cash App and Square acting as a rock-solid foundation for the firm as it looks to explore new frontiers.

Growth Slows, Bitcoin Weighs, Afterpay Looking Less Appealing

Block’s latest quarter witnessed slowing growth, with gross payment volumes up just 23%. The negative move in bitcoin negatively impacted the results. Further, the $29 billion acquisition of BNPL (Buy Now Pay Later) firm Afterpay now looks ill-timed.

Installments had their time to shine. With a downturn in consumer spending on the horizon and rivals hungry to enter the space, valuations across BNPL pure-plays have dropped substantially.

Indeed, Block should have created its own BNPL service or waited another year before pursuing a deal. Going into 2023 (a year that could see a recession), the Afterpay price tag could become even more painful.

In any case, the company will be busy integrating the Australia-based platform to strengthen Seller and Cash App. Even with such integrations, I find it doubtful that the Afterpay deal will prove worthwhile should a recession hit next year.

Is SQ Stock a Buy or Sell? Analysts Weigh In

Turning to Wall Street, SQ stock comes in as a Moderate Buy. Out of 35 analyst ratings, there are 27 Buys, seven Holds, and one Sell.

The average Block price target is $112.20, implying upside potential of 29.4%. Analyst price targets range from a low of $64.00 per share to a high of $175.00 per share.

Conclusion: SQ Stock Looks Undervalued

Block stock has already been put on the chopping block. Though the firm may have got caught with its pants down amid the 2021-22 market sell-off, I do think the mere 3.1x sales multiple undervalues Jack Dorsey’s exceptional stewardship.

If you seek a crypto-flavored fintech at a discount, I think it’s hard to pass up the name, even with prior hiccups.

Disclosure

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