Block (SQ) Stock Pops Despite Earnings Miss. Here’s Why.

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  • Fintech firm Block (SQ) jumped higher on generally positive data despite its earnings miss.
  • An Evercore ISI analyst upgraded SQ stock on management’s streamlined strategy shift.
  • Consumer economy woes may pose an ongoing challenge.
SQ stock - Block (SQ) Stock Pops Despite Earnings Miss. Here’s Why.

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Amid another rough session on Wall Street due to a hotter-than-expected inflation report, Block (NYSE:SQ) managed to spark some smiles among beleaguered investors. Although the company reported a miss on its latest earnings report, the granularity provided positive substance. An Evercore ISI analyst also upgraded SQ stock based on management’s streamlined strategic framework. Nevertheless, consumer economy woes still cast a shadow over the financial technology (fintech) firm.

By the numbers for its fourth quarter, adjusted earnings per share came in at 22 cents. However, analysts forecasted that EPS would hit 28 cents. On the other hand, Block rang up $4.65 billion in revenue, beating out the consensus estimate of $4.57 billion. The company also delivered a gross profit of $1.66 billion against the target of $1.63 billion.

Block’s core point-of-sale merchant business Square reported gross profits of $801 million. This tally represented a 22% year-over-year lift. Notably, Block’s Cash App — a mobile payment service — generated a gross profit of $848 million, outmatching Square for the first time. Analysts anticipated that Cash App would bring in $799 million. Additionally, Cash App’s gross profit jumped 64% YOY.

Interestingly, Block’s cryptocurrency business posted a gross profit of $35 million on $1.83 billion in revenue. Per Yahoo Finance, this dynamic represented “…a lower margin on higher revenues than Wall Street anticipated.”

Finally, Block’s buy-now, pay-later (BNPL) operator Afterpay — which it acquired in the summer of 2021 — contributed $196 million in gross profit. This represented a solid step forward from the $150 million posted in Q3.

SQ Stock Receives an Upgrade

Aside from the positive details of the Q4 report, Block CEO Jack Dorsey laid out a new investment framework. Utilizing three principles, the strategic shift should theoretically streamline Block and thereby benefit SQ stock.

“Number one, ensure our investments are focused on customer retention and growth; number two, account for ongoing cost of the business, including stock-based compensation; and number three, utilize industry standard conventions that are simple to communicate and to understand,” stated Dorsey during the Q4 earnings call.

Intriguingly, Dorsey added that “[o]ver the long term, we expect the average annual gross profit retention of our [Cash App and Square] ecosystems to be above 100%.”

The strategic decision caught the attention of Evercore ISI analyst David Togut, who upgraded SQ stock to “in line” from “underperform.” In a research note, Togut appreciated Square’s commitment to increased financial discipline. An example of this pivot includes limiting headcount growth to 10% this year. In contrast, Block raised its headcount by 46% last year.

Interestingly, SQ stock overall holds a consensus “moderate buy” view among covering analysts. This assessment breaks down individually to 12 buy ratings, five holds, and zero sells. In addition, analysts’ average price target stands at $89.88. At the time of writing, this target implies over 17% upside potential.

Consumer Economy Woes May Drag Block

Although Block’s Afterpay business delivered significant momentum, management also included a memo regarding its results. It mentioned that delinquencies for the BNPL operator jumped 31% to a total amortized cost of $2 billion through Q4.

As Yahoo Finance mentioned, “[r]ising delinquencies suggests Afterpay may need to tighten credit to customers, narrowing the division’s revenue in future quarters.” Moreover, the Federal Reserve’s efforts to combat rising inflation may add more pain to the consumer economy. Therefore, SQ stock isn’t quite in the clear.

On the date of publication, Josh Enomoto 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.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.


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