Since Block (NYSE:SQ) reported Q4 2021 results after the markets closed on Feb. 24, SQ stock is up more than 26% through March 3.
The digital payments company hasn’t traded above $200 since late November, but this very well could be the beginning of a move back. SQ stock trades at about $106.
In early February, I suggested Block was an outright steal under $100. At the time, it was trading a couple of bucks above that. SQ hadn’t traded below $100 since the beginning of the pandemic.
Well, sure enough, leading up to its earnings announcement, Block shares fell to a 52-week low of $82.72 on poor investor sentiment. After that, however, Block reported good, if not spectacular, results.
On the top line, revenues were 29% higher than Q4 2020 at $4.1 billion. Adjusted earnings per share were 27 cents, five cents less than a year earlier. As for the analysts, revenues were spot-on the consensus estimate, while earnings were four cents better than expected.
In addition, gross payment volume (GPV) rose 44.7% to $46.3 billion during the quarter, $300 million higher than the analyst estimate.
For all of 2021, excluding Bitcoin (BTC-USD), Block’s total net revenue was $7.65 billion, 55% higher than 2020. In addition, its adjusted net income for 2021 was $1.71, 103% higher than 2020.
At $82.72, it was trading at 48x its 2021 earnings, 62x 2022 estimate of $1.34, and 38x 2023 estimate of $2.16. Analyst estimates for 2022 have fallen by 25% in the past three months, while their 2023 estimate is down 23%.
In 2021, Block beat earnings estimates by 141% in Q1, 100% in Q2, missed by 2.6% in Q3 and beat by 17% in Q4, for an average surprise of 64%. The company is likely to continue beating estimates in 2022.
Despite the 26% gain since earnings, SQ stock trades at 3.5x sales, its lowest multiple since 2016. I think it’s fair to say that it’s worth closer to its five-year P/S ratio of 8.4. If so, that alone would put SQ over $200.
Cash App Drives the Bus
Block had a gross profit of $1.18 billion in the fourth quarter. Cash App accounted for 44% of it, while the Square ecosystem accounted for 56%.
For 2021, Cash App’s gross profit was $2.07 billion, 69% higher than 2020, and just $250 million less than the Square ecosystem. Over the past two years, it’s grown by 113%.
The Cash App and Square ecosystems have become a tremendous one-two punch that ought to carry SQ shares back to $200 and beyond.
As the company pointed out in its Q4 letter to shareholders, Cash App had 44 million monthly transacting actives, 22% higher than a year earlier. In addition, Cash App introduced a new feature in Q4 that allows users to send fractional shares and Bitcoin to friends and family. Over time, that will have a significant impact on Cash App engagement.
Block says it cost them $10 to acquire a monthly transacting active (a customer who makes at least one transaction) during the quarter. However, the gross profit on these monthly transacting actives is $47, allowing it to get its $10 back within the first year.
In January, Block launched Cash App Taxes, allowing Cash App users to file their taxes for free digitally. It’s just another way to get and keep Cash App users.
Not only was 2021 an excellent year for Cash App, but 2022 looks poised to be even better. During its Q4 2021 conference call, Block management said that January and February saw Cash App gross profits increase 71% over the same period two years ago.
Further, it could hit a gross profit of $550 million in Q1 2022. Considering the Cash App gross profit in Q1 2021 was $495 million, I suspect it will blow through $550.
There are so many things to like about Block; it’s not hard to understand why out of 43 analysts, only two rate it an outright sell, while 29 believe it’s an outright Buy.
The Bottom Line
CNBC’s Jim Cramer recently had positive things to say about Block.
“You need to understand just how special these stocks are,” Cramer said. “While they can have some huge swings, once the volatility’s over, I bet they won’t easily give back their gains.”
Cramer also said Block was “firing on all cylinders.” I couldn’t agree more.
I think investors have undervalued the positive effects of its acquisition of the buy-now-pay-later platform, AfterPay will have on its top and bottom line.
I’m not sure you’ll be able to buy SQ stock for $120 for much longer. Under $120, it’s an excellent long-term buy. As I said in February, it’s a steal under $100. However, I doubt you’ll get the opportunity.
On the date of publication, Will Ashworth did not have (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.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.
