The Recent Slump Offers an Opportunity for Block Investors

Over the past few years, the financial technology (fintech) giant Block (NYSE:SQ), formerly known as Square, has been in the spotlight as a robust growth stock. But since late 2021, SQ stock has come under significant pressure. As I write, it is trading 52% off its record high of $289.23 hit in Aug. 2021.

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

Rising inflation levels and anticipated interest rate hikes have hit SQ stock hard. Understandably, investors are shifting toward safe-haven investments. As a result, Block stock plunged over 60% in the past 52 weeks. By comparison, the Global X FinTech ETF (NASDAQ:FINX) lost about 35% of its value.

SQ stock recently saw a 52-week low of $82.72. Now analysts are debating whether the beaten-down shares can recover anytime soon. Despite the recent selloff in SQ shares, the company’s seller and consumer businesses are booming. Management is looking at growth opportunities in the crypto space as well.

Therefore, given the significant dip in SQ stock, I believe most of the company’s headwinds have already been baked into the share price. Thus, buy-and-hold investors could consider hitting the buy button in March. Let’s see why.

The Fintech Space Is Still Growing

Block had started life over a decade ago as a payment processing platform for small merchants with its point-of-sale (PoS) payment terminals. In its early days, it generated revenue from transaction processing fees and subscription services. Block’s business payments app still contributes significant profit to the bottom line.

But since then, Block has since expanded its fintech services, adding the consumer peer-to-peer (P2P) payment ecosystem Cash App and blockchain technology to its offerings. Cash App enables the company to generate revenue from merchant fees, bank transfers and investments.

Management has been expanding operations. For instance, it has been looking at growth opportunities in the crypto space. Its digital asset segment, Spiral (formerly known as Square Crypto) has become a separate entity, advancing the uses of cryptos, specifically Bitcoin (BTC-USD).

In January, Block officially finalized its $29 billion acquisition of the “buy now, pay later” group Afterpay. The deal aims to help Square sellers offer financing to their customers. Block will also integrate Afterpay into its Cash App platform to allow users to finance small-scale online purchases. Afterpay is expected to encourage consumers to spend more, boosting Block’s entire ecosystem.

The global fintech market is forecast to reach around $324 billion by 2026. Such an increase in the total addressable market (TAM) would mean a compound annual growth rate (CAGR) of more than 25% between 2022-2027. Going forward, analysts expect Block to increase its market share further in this lucrative market.

Block’s Q4 Earnings

Management issued Q4 earnings in late February. Revenue rose by 29% year-over-year (YOY) to $4.08 billion. But adjusted earnings per share (EPS) fell 16% YOY to 27 cents. A year ago, EPS had been 32 cents.

Investors were pleased to see an impressive growth in volumes flowing through the seller ecosystem. Transaction-based revenue soared 41% YOY to $1.21 billion as more businesses reopened after the pandemic.

At the end of 2021, the Cash App reached 44 million monthly active transacting users, up 22% YOY. Revenue increased as P2P payments, Cash Card and stock-trading tools gained popularity.

Meanwhile, Bitcoin revenue soared 12% to $1.96 billion, a significant slowdown from the 889% growth a year ago. The segment only represented 5% of overall gross profit with a thin 2% gross margin.

Prior to the release of Q4 results, SQ stock was shy of $95. Then, in a couple of days shares went over $130. However, the euphoria was short-lived as Block investors decided to take money off the table. SQ stock has since dipped up and down between $95 and $125.

The Bottom Line on SQ Stock

Block should continue growing as it benefits from the user base it has created around the Square and Cash App ecosystems. Meanwhile, Afterpay should contribute to both platforms.

Among 36 analysts polled, SQ stock has a “buy” rating. Also, the consensus of 26 analysts for a 12-month median price target stands at $179, representing an upside potential of roughly 40% from current levels. The 12-month price estimates for the stock range between $120.0 and $240.

Furthermore, SQ shares currently have a reasonable valuation at just 3.6 times trailing sales. However, despite Block’s long-term growth potential, shares are likely to stay volatile in the short-run. Therefore, SQ stock is currently more suitable for buy-and-hold investors who can focus on the company’s long-term prospects instead.

On the date of publication, Tezcan Gecgil 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.

Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.


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