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Don’t Read Too Much Into Square Stock’s Recent Spike … It’s Still a Dud

InvestorPlace - Stock Market News, Stock Advice & Trading Tips Exceeding low expectations with earnings, the bounce back in SQ stock won't last, as the fintech firm's issues come back...

This story originally appeared on InvestorPlace

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Investorplace.com - InvestorPlace

Much like its corporate name, sentiment about Block (NYSE:SQ), formerly Square, seems to change at the drop of a hat. Before, the crowd was avoiding SQ stock in droves.

The logo for Block (SQ) is shown on a phone screen with the company's old name and logo, Square, visible behind the phone.
Source: Sergei Elagin / Shutterstock.com

Partially due to the cycling out of tech, but mostly due to growing bearishness about its prospects, shares in the fintech firm dropped by well over 60% between November 2021, the 24th of last month. Yet now, following its latest earnings release? The market is warming back up to it in a big way.

Obviously, it has not recovered from its losses, not even partially. However, spiking around 26.1% on Feb. 25, and moving higher since then, it may look as if it's getting ready to make a massive comeback in the months ahead. Will this happen? Don't count on it. What we're seeing now is a short-term spike, driven by the company, delivering numbers well ahead of lowered expectations.

The takeaway? Don't expect this boost to last. Key issues are still in play. Once these come back into focus? It'll put more pressure on it, sending shares back below the $100 per share mark.

SQ Stock and Its Recent Earnings

In the weeks leading up to Block's Q4 (quarter ending December 31, 2021) earnings report, expectations ran low. This was, to a large extent, due to disappointing results from one of its main competitors. This was also on top of existing pessimism for fintech, which started building up late last year, as fears rose that growth would slow down after the boom times experienced during the pandemic era.

Yet when the company reported numbers after the close on Feb. 24, investors reacted positively. Instead of sinking further, SQ stock made a double-digit percentage bolt higher within a trading day. With this, it must've really hit it out of the park, right?

While the results weren't bad, I wouldn't say they crushed it. For the quarter, Block beat analyst expectations when it came to revenue and earnings. Revenue of $4.08 billion came in slightly above consensus, which called for a top line of $4.06 billion. Adjusted earnings-per-share (EPS) of 27 cents were above the Street's projection of 22 cents.

What really drove its post-earnings spike, though, was the results from its Cash App unit. Along with this, another factor (more below) may or may not explain why these numbers produced an outsized move. A move that again could prove to be short-lived.

Big Concerns Remain on the Table

For months, there has been some uncertainty surrounding its Cash App unit. Throughout 2021, its rate of growth slowed down, heightening fears that high growth for this consumer-focused unit was entirely a "one and one" event driven by the pandemic. Ahead of its earnings report, Wall Street believed this unit would again deliver underwhelming numbers.

For Q4 2021, Cash App's growth (as measured by gross profit growth) came in much considerably lower (37%) than it did in the prior year's quarter (162%). But with this profit growth up slightly on a sequential (quarter-over-quarter) basis? Investors are taking this a sign that things are speeding back up for the popular peer-to-peer payment app.

This played a major role in the market stampeding back into SQ stock, not too long after it stampeded out of it. It's not for certain, yet a short-squeeze may have also occurred, further explaining the outsized move. Whatever the reason, there's a strong chance this post-earnings rally peters out, and shares fall back toward their recent lows.

Why? First, growth is still set to decelerate throughout 2022. Analyst estimates for this year's revenue call for top line growth of just 6.3%. Estimated EPS of $1.71 is just a few cents above the 2021 EPS figure ($1.67). Second, as I've talked about previously, CEO Jack Dorsey remains committed to his crypto-centric vision for the company's future. This has had disastrous effects on Block's share price, and could continue to do so.

Bottom Line on SQ Stock

Just like last time, SQ stock gets an "F" rating in my Portfolio Grader. The crowd has reacted positively to last week's earnings report. Reading too much into it is more like it. Things for the company, and Cash App in particular, may not be as dire as expected as recently as mid-February.

At the same time, however, other issues remain on the table. Growth is slowing down versus the strong numbers reported in 2020 and 2021. As it matures, its high valuation will likely come down with it.

The big move into crypto is another red flag too. With all due respect to Dorsey, the founder or co-founder of Silicon Valley success stories, he seems to have gone off the deep end with his crypto obsession.

To top it all off, it's unclear whether Block's recently closed purchase of Afterpay will help to kick things within its ecosystem back into high gear.

Until the issues that knocked it down in the first place are resolved, avoid SQ stock.

On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.

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