Block (NYSE:SQ) has been a popular choice for businesses seeking digital payment solutions. Largely because the company is not yet profitable, this fintech stock trades around $45 per share, down 29% year-to-date. That’s close to its 52-week low, presenting a compelling buying opportunity for some long-term growth investors.
Indeed, Block has potential in the expanding digital payments sector. However, immediate gains might not be seen. Patience is key for substantial returns. The market for growth stocks and fintech plays is vast. While Block has the potential to become profitable, competition for consumer dollars will remain fierce. That said, it’s my view that those taking a long-term view of this sector may want to consider Block as a premier option right now.
Let’s dive into why this fintech stock is worth looking at right now.
Strong Earnings Support Growth Thesis
Block’s Q2 earnings exceeded expectations, with earnings coming in at 39 cents per share and net revenue of $5.53 billion. Gross payment volume reached $54.2 billion, slightly below estimates, while the company’s core Cash App gross profit was $968 million, surpassing projections.
Block’s current valuation relative to these results is attractive. While the company’s gross profit growth slowed to 27%, its top line growth is noteworthy for those who believe Block can raise its margins over time. Indeed, gross profit deceleration is expected to continue, which is hampering this stock. So, it really depends on whether investors believe this is a short-term phenomenon, or a more problematic issue that’s here to stay.
Notably, Cash App had 54 million monthly users in June, and EBITDA exceeded expectations at $384 million. The company now expects $1.5 billion in adjusted EBITDA for 2023, surpassing analysts’ forecasts.
Strong Q2 Earnings and Q3 Projections
In Q2 2023, Block showcased strong growth with notable gains in gross profit from both Square and Cash App. The company has made strides in reducing operating losses by tightening expenses through fewer hires and office space reductions.
During the Q2 2023 earnings call, CEO Jack Dorsey noted ongoing efforts to enhance cost efficiency within their ecosystems. Block increased its full-year adjusted EBITDA guidance to $1.5 billion, an increase from the previous $1.36 billion. The company is next set to report its Q3 earnings on Nov. 2.
SQ Stock Is Worth a Hold, at Least
Investors value Block’s competitive edge, particularly within its Square segment. Switching costs act as a strong deterrent for merchants who rely on Square’s comprehensive payment and operational services. As more customers use multiple Square products, the company’s gross profit increases. This customer stickiness is a crucial factor in Square’s success.
Additionally, it’s worth noting thatCash App has offered Bitcoin trading services, charging small fees. While this posed challenges during Bitcoin’s decline, the recent surge in its value could drive growth for Block. Furthermore, younger users continue to make up a significant portion of Cash App customers. Thus, for those betting the banking system will be forced to change, this is a company that could be driving a lot of that change.
Bottom Line
Block’s growth prospects are bright with strategic alliances. A partnership with African Crypto Exchange Yellow Card aids cross-border payments across 16 African nations. A four-year extension with Marqeta, a Brazilian credit card company, ensures a steady revenue stream, aligned with Brazil’s economic growth.
Block’s significant presence among small and medium businesses offering these services bodes well for SQ stock. That said, Block’s inexpensive valuation at a price-to-sales multiple of 1.8-times suggests investment potential at current levels. This is a fintech stock on my buy list, but I’m being patient waiting for an entry point.
On the date of publication, Chris MacDonald 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.
