Block Is Set to Rebound After a Strong Fourth-Quarter Earnings Report InvestorPlace - Stock Market News, Stock Advice & Trading TipsSQ stock is suffering from the wider tech selloff, concerns regarding competition and weakness in cryptos -- but its future...
By Faizan Farooque •
This story originally appeared on InvestorPlace
InvestorPlace - Stock Market News, Stock Advice & Trading Tips
Block (NYSE:SQ) stock rose sharply Thursday after the company formerly known as Square provided an optimistic forecast for the second quarter and the full year. The turnaround is something SQ stock investors were looking for after a mixed-third quarter.
Square's growth in gross profits has been slowing over the past two years. It started to see this after the second quarter of last year, pegged at 128%. Slow growth and a tough advertising market pushed Square to adjust its strategy and implement several marketing strategies. This can be seen by the third quarter, which saw 104% in growth.
However, Block is a multi-billion-dollar business that encompasses many aspects of finance, including tech and payments. It has revolutionized the way people pay with their smartphones by allowing them to process transactions through the Square app.
In addition to this service, it also have a point-of-sale system for small businesses called Square that helps companies run their day-to-day operations more efficiently.
Square recently rebranded to Block in December. The change was made because their business has expanded, including the new Cash App for mobile payments and Tidal for streaming music. The company is also focusing on blockchain.
The best time to invest in a company is when its value has been depressed. One of the ways you can do this and get great returns is to purchase discounted growth stocks after selloffs. If you want to pick up a quality fintech play at excellent price multiples, SQ stock is the one investment you need in your portfolio.
Excellent Fourth-Quarter Earnings
Shares of Block turned around in a big way after it offered some forward-looking insights into their profits. The company is expecting impressive growth for its Cash App business in January and February.
Maintaining momentum following last month's record levels will be crucial. As far as Block is concerned, the results of January were affected by the omicron variant. But Block predicted it would only grow even more impressively in February.
Looking forward, the company expects a higher gross profit growth rate in both its Cash App and Square seller business. This is due to sustained profits throughout the year with no signs they will decrease anytime soon.
Block expects its performance to be easier to compare throughout the year, not just this quarter. This follows news of new product opportunities and pricing adjustments.
Adding More Color to the Numbers
Block reported Q4 fiscal year 2021 earnings that beat analyst expectations. Adjusted earnings per share (EPS) outperformed analyst estimates.
Net revenue increased by 29% year-over-year (YOY). Block achieved a higher payment volume than expected. Block's gross payment volume (GPV) met expectations at $46.3 billion, up 45% (YOY).
Gross Payment Volume is a key metric for the industry. It is used to measure the total amount of money that flows through a payment system, such as a bank, in a given period.
Users can send and receive payments with friends who have a Block mobile wallet, plus buy things in stores that accept Bitcoin (BTC-USD). It charges a fee on payments of this size, which constitute a major source of its revenue. The fee is calculated based on the total transaction amount.
GPV also provides insight into the many different users that utilize the company's platform. Suppose Block can attract more people to this main payments ecosystem. In that case, it will direct traffic from other businesses.
The more transactions it hosts, the higher the income Block can generate. Its transaction-based revenue in Q4 2021 was $1.3 billion, up 41% YOY.
Revenue from transactions is on the rise. It was their second-biggest revenue source next to Bitcoin. Other sources of income included service-based and hardware revenue.
Issues in the Business Model
Block's overall profit rose to $1.18 billion, up from $804 million last year. Analysts had been predicting earnings of $1.16 billion. It's important to consider your Gross Profit.
According to their filings, Block generated $4.08 billion in revenue for the year past, up from $3.16 billion last year and exceeding analysts' expectations of an income of $4.04 billion. The company also generated $1.96 billion in Bitcoin profit.
However, there are certain aspects of the business model that are cause for concern. Cryptocurrencies, led by Bitcoin, are losing steam in the year thus far. Until they start trending upward again, SQ stock will remain under pressure due to its heavy investment and exposure to the crypto space.
Block has lots of great things it can use to drive its growth, including more crypto-related products and services. It has also acquired the blockchain payment app Afterpay, a major purchase for the company.
Wall Street is abuzz with talk of how much money Block has been putting into its Cash App. The company announced it will offer mobile check and paper money deposits in the app, which could mean big things for investors interested in this innovative business model. Nevertheless, matching the growth rates achieved during the pandemic will be tough.
Risks to the Thesis
With many different types of customers, it's hard for software products in the consumer financial industry to compete with those in the small business market. SQ's offerings are difficult for its competitors to match. However, that doesn't mean it's not willing to try.
PayPal (NASDAQ:PYPL) is a successful company that provides an online platform for transferring money. It is one of the most popular online payment methods. In the last few years, it has seen significant growth and success with its features like Venmo and Braintree.
PayPal is just one of Block's strong competitors. The list ranges from Shopify (NYSE:SHOP) and other payment processors to merchants that use First Data's Clover unit.
Meanwhile, Square made a $170 million investment in Bitcoin in early 2021. Their profit reports won't include the unrealized gain from this investment, and Bitcoin will be excluded from total earnings.
The speculative nature of cryptos has caused their downfall, and people have become more cautious about investing in them. This sentiment is also weighing down on SQ stock.
What Does the Future Hold for SQ Stock?
Block is also marketing Cash App to kids and teenagers, making it available to users ages 13 to 17 in the US. It has plans for broad adoption of Cash App in the future with integration of Afterpay. This should boost transaction rates and thus provide a chance for the app to gain popularity.
With the recent growth of crypto, Block has also taken an interest. It is now accepting Bitcoin on Cash App and earning a small fee from related transactions. That's not all it's doing, though. The company announced a new business unit, including platforms focused on decentralized finance (DeFi).
A trend seems clear: More companies are getting into cryptocurrency because it can be profitable while remaining safe from volatility or restrictions like capital gains taxes. But there is no telling how long this trend may last; we'll have to wait until things become clearer.
In January, Block announced plans to build a system for Bitcoin mining. Recently, CEO Jack Dorsey announced a new business line to provide software developers with the tools they need to design financial services products that focus on Bitcoin. Additionally, Dorsey has said the company may create a Bitcoin wallet.
Buy SQ Stock to Future-Proof Your Portfolio
SQ stock faces stiff competition in the consumer financial app market and small businesses. Cash App was a popular alternative to traditional banks during the coronavirus pandemic in 2020. The company's stock also experienced significant growth that year and into 2021 as investors focused on its potential for success with new products.
Cash App's direct deposit feature was especially popular with consumers, who used it for government stimulus payments and other benefits. But Cash App revenues slowed over the summer, leading to a change of pace for investors.
However, Block's service revenue has increased from its more recent products, Cash Card and Instant Deposit. And besides selling credit-card readers and related peripherals, Block also provides software for point-of-sale and back offices.
Block has released many software products that can change how you run your company. Those included invoicing, payroll and marketing. It also aims to integrate payment tools into its e-commerce platforms.
Overall, Block has seen great success in recent years and has amazing growth potential. Its success is due to its innovative business model and great stock performance. Therefore, SQ stock is a growth pick to purchase.
On the publication date, Faizan Farooque did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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