While Block (NASDAQ:SQ) stock is very much a mixed bag at this point, for investors there’s much more to hate about the name than to love about it. On the negative side of the ledger are the company’s recent CEO change, its intense competition, its crypto exposure, the fact that Wall Street appears to have lost confidence in it, and its uninspiring financial results. On the other hand, Block is likely to benefit from upcoming macro trends, and its valuation has become much more attractive.
A New/Old CEO and Intense Competition
On Sept. 19, Block announced that its CEO, Alyssa Henry, would resign as of Oct. 2 and that the company’s cofounder, Jack Dorsey, would take the helm at the firm as of Oct. 2.
I view Dorsey as a known quantity who’s a competent manager but is far from a transformational genius. During his long tenures as CEO of Twitter and Block, Dorsey equipped both companies with the tools to survive but not thrive. Put differently, both companies are in second place in their sectors, as Twitter was not as successful as Facebook and Block has played second fiddle to PayPal (NASDAQ:PYPL). Therefore, I do not expect SQ stock to surge tremendously under Dorsey’s tenure in the coming quarters and years.
Meanwhile, Block continues to face a great deal of competition. Among its major competitors are PayPal, which also offers physical payment equipment for small businesses and Shopify (NYSE:SHOP), which provides a POS system for e-commerce companies. SQ also has to contend with many smaller, growing fintech firms such as Stripe, Adyen and Zettle, while the major credit card networks compete with SQ on many fronts including buy now, pay later.
Crypto Exposure, Uninspiring Results, and Less Admiration from Wall Street
According to Barron’s, “Block….not only owns Bitcoin, buy also allows customers to buy and sell the largest crypto via its Cash App platform.” After conducting a significant amount of research about Bitcoin, I believe that the crypto’s prices have remained elevated primarily because it’s being used by tax cheats and other criminals. Consequently, I think that the United States government, sooner or later, will look to crack down on this phenomenon. This will cause the crypto’s value to drop sharply and greatly limiting its popularity. Such a development, of course, would be negative for Block and SQ stock.
Meanwhile, Block’s year-over-year gross payment volume growth slowed to 21% in July, down from 27% for all of Q2. Moreover, for the full year, the company only expects to generate a relatively paltry $25 million of operating income.
Also noteworthy is that Wall Street has appeared to lose confidence in SQ stock this year, as the shares have tumbled 39% in the last three months, while they’re down 26% for all of 2023.
Positive Macro Forces and an Undemanding Valuation
As I’ve noted in previous columns, I expect a combination of weakening travel spending and the continued, strong labor market to result in increased demand for physical products and close-to-home entertainment by American consumers going forward. Given Block’s large exposure to small and medium businesses, which tend to provide such products and services, that trend should be positive for SQ stock.
And on the valuation front, SQ is changing hands at a forward price-earnings ratio of 19 and a trailing price-sales ratio of 1.4. That’s a rather low valuation, since analysts, on average, expect the company’s earnings per share to climb to $2.40 in 2024 from $1.73 this year.
On the date of publication, Larry Ramer did not hold (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.
