These 2 Issues Are Weighing Heavily on Block Stock

Overall, fourth-quarter results from Block (NYSE:SQ) indicate one major thing: the company’s tough competition issues, which I warned about in a previous column on SQ stock, are sharply undermining its profitability. Additionally, I continue to worry that the likely upcoming popping of the cryptocurrency bubble will weigh on Block’s results and its shares.

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

Why? Let’s dive in and take a closer look

Block’s Profitability Metrics Are Unimpressive

One straightforward indication that Block’s profitability was unimpressive in Q4 was its operating loss during the quarter, which came in at $54.6 million. Also, another was its net loss for the quarter. And at $81 million, was even worse.

Moreover, for a tech company with a high valuation, Block’s margins are not too elevated. Its EBITDA margin, excluding certain items, is 2.3%. By comparison, Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) EBITDA margins have been around 35% in recent quarters, while those of Microsoft (NASDAQ:MSFT) over the last year was about 49%. What’s more, in Microsoft’s 2017-2021 fiscal years, its average EBITDA margin was above 43%.

Meanwhile, Block’s average gross margin in 2021 was slightly over 23%, while many successful tech companies have gross margins in the 50%-70% range.

High Marketing Costs and Tough Competition

Furthermore, Block’s sales and marketing costs surged to $485 million last quarter, from $329 million during the same period a year earlier. That’s a year-over-year (YOY) increase of roughly 47%. Similarly, for the year, the company’s sales and marketing costs jumped 46% to $1.62 billion. The latter figure represented a hefty 47% of Block’s total 2021 operating expenses.

Additionally, in my previous column, I wrote that “In addition to (Block’s) stiff competition from PayPal (NASDAQ:PYPL) and Shopify (NYSE:SHOP), Apple (NASDAQ:AAPL) could be getting ready to provide payments systems to small businesses.”

I also pointed out that PayPal’s Zettle is cheaper than Block’s Square for merchants, while NerdWallethighlights Shopify’s POS system as ‘good for e-commerce.'” Finally, I noted that Block’s Cash App has to compete with Zelle, created by a number of large banks, PayPal’s Venmo, and SoFi’s (NASDAQ:SOFI) SoFi Money.

Overall, I believe that Block’s sales and marketing costs are growing rapidly in large part because the company has had to spend a great deal of money in those areas to avoid losing market share to its many competitors. And that’s a tough hill to climb.

Crypto Still Looks Headed for a Fall

Even though cryptos, led by Bitcoin (BTC), recently had a brief, upward spurt, neither Bitcoin in particular nor cryptos in general looks very strong these days. As InvestorPlace news writer Brenden Rearick explained in his March 3 article, “Cryptocurrency in general just seems to be showing less endurance on its upward runs. Coins and tokens are generally trending down, with a few exceptions.”

Indeed, long gone are the days of a year ago when Bitcoin and other cryptos would post tremendous rallies, such as doubling within a week. And unsurprisingly, with those days over, many crypto investors appear to be spending less on the asset class or fleeing the market altogether.

Good indications of those phenomena are provided by the recently issued Q1 guidance of Coinbase (NASDAQ:COIN), the world’s largest crypto exchange. Coinbase reported that its “subscriptions and services revenues” were trending lower in Q1 than in Q4. And according to TechCrunch, the company’s Q1 revenue  “appears set to shrink sharply” in the current quarter versus the previous one.

Additionally, as I’ve stated in past columns, I expect cryptos to dive significantly soon after the Federal Reserve’s asset purchases end completely this month. That’s because history shows that the value of cryptos tends to jump when the government injects financial stimulus into the economy, then drop sharply when the stimulus is withdrawn.

Also, just today it was announced that “President (Joe) Biden is set to sign an executive order that will direct the federal government to come up with a plan to regulate cryptocurrencies, recognizing their popularity and potential to destabilize traditional money and markets.”

All of this is likely to be very bad news for Block and SQ stock. That’s because incredibly, in 2021, $10 billion of the company’s $17.66 billion of revenue came from Bitcoin.

The Bottom Line on SQ Stock

Given Block’s poor profitability and its high dependence on cryptocurrencies, I recommend that investors sell the stock.

On the date of publication, Larry Ramer held a short position in COINThe opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015.  Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.


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