As of Dec. 1, Block (NYSE:SQ) is the new name of the company formerly known as Square. This portends its future focus on blockchain technology including Bitcoin (CCC:BTC-USD) and the company’s focus on digital payment assets and solutions. I would expect that, just like Meta Platforms (NASDAQ:FB) (parent of Facebook) changed its name to focus on digital assets, SQ stock will reflect this change as well.
For example, I would not be surprised to see Block issue its own cryptocurrency at some point. Moreover, don’t be taken aback as well if it begin to require transactions to be done in its crypto.
Or the company could charge a fee for all transactions done in “fiat” currency (read dollars, euros, etc.). It might also have no charge for transactions done in its new crypto or other blockchains.
Now, just to be very clear, this is just my conjecture. Block has not stated that it will do this at all. But don’t forget that this seems to be the natural progression of a company like this.
For example, recently AMC Entertainment (NYSE:AMC) started issuing NFTs (non-fungible tokens). It already accepts online payments for tickets done in several cryptocurrencies, including Bitcoin, Bitcoin Cash (CCC:BCH-USD) and Litecoin (CCC:LTC-USD). The company has even discussed its customer base’s interest in Dogecoin (CCC:DOGE-USD).
Where Things Stand With Block
Block’s primary focus is clearly now financial services. That is a long way from its original purpose as a seller-based company targeting restaurants and retailers. Now the company has its Cash App and offers people the ability to buy stocks and cryptos on the app.
On Nov. 4 the company reported mixed quarterly results for the quarter ended Sept. 30. For example, revenue was up 43% year-over-year (YoY) to $1.13 billion. That’s great, but compared to its prior quarter not so impressive. On a Q0Q basis, revenue was flat since Q2 sales were $1.14 billion.
Moreover, adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was lower in Q3 compared to Q2. It made just $233 million in Q3, vs. $360 million in Q2. The company did not address why this happened.
I suspect expenses relating to the acquisition of Afterpay in Australia announced in Aug. lowered the adjusted EBITDA. in Q3. This deal will close in Q1 2022. So, if that is the case, one might assume that this was a one-time dip in adjusted EBITDA and should not be of too much concern.
However, that said, the company clearly guided to higher expenses in Q4. Management wrote on page 15 of the shareholder letter that they expect $115 million more in expenses in Q4 over Q3. This is due to ongoing non-GAAP product development, sales and marketing and general and administrative expenses.
Where This Leaves Investors in SQ Stock
The higher Q4 expenses seem to imply that its regular expenses not related to the Afterpay acquisition are moving higher. That will mean that sales growth will have to be even higher to cover these higher ongoing expenses. As a result, I expect that investors may not be too pleased with the Q4 results.
So don’t be too surprised with a faltering SQ stock by mid-January to February. Nevertheless, the average revenue forecast by 34 analysts surveyed by Seeking Alpha is for 7.3% higher sales at $19.01 billion by the end of 2022.
This puts SQ stock on a forward price-to-sales (P/S) multiple of just 4.6 times, as the company had a market capitalization of $87.42 billion at close on Dec. 9. By contrast, PayPal (NASDAQ:PYPL) trades for a forward P/S multiple of 7.46 times. However, 46 analysts expect their sales to be 19.1% higher in 2022. That is over twice the growth rate at Block.
That implies that SQ stock is probably fairly valued. Lower growth usually leads to a lower valuation metric. So, for the time being, most cautious investors will wait for a better bargain opportunity to buy into SQ stock.
On the date of publication, Mark Hake 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.
Mark Hake writes about personal finance at mrhake.medium.com and Newsbreak.com and runs the Total Yield Value Guide which you can review here.