When you think of SQ stock, cryptocurrency Bitcoin quickly comes to mind. There’s also a big acquisition to mull for Square stock as well as a corporate rebranding.
Amid rising fears of a U.S. recession, one question is how resistant Square-parent Block (SQ) will be to a business downturn versus other digital payment companies. If the Federal Reserve successfully engineers a “soft landing” for the U.S. economy, that would be a plus for Block stock.
Block Stock: Short Seller Attacks
Shares in Block plunged March 23 after Hindenburg Research disclosed a short position in SQ stock while claiming that the digital payment company inflates Cash App user metrics and facilitates fraud.
Square fought back against the charges. The company said it may pursue legal action against Hindenburg.
Many analysts backed up Block.
” The biggest accusation from the short-seller, from our interpretation, is that SQ is effectively a fraudulent business both in operations/reporting while allowing nefarious activities on its platform,” Oppenheimer analyst Dominick Gabriele said in a note to clients. “We believe the probability these accusations are correct is extremely low.”
At UBS, analyst Rayna Kumar said in a report: “One widely discussed claim from the report is that Block conceals the number of users on the Cash App platform by disclosing transacting active metrics based on fake and duplicate accounts, suggesting the reported user metrics are inflated. While we cannot verify whether or not that claim is true, we note that Cash App users is only one metric provided by Block to assess the performance of the Cash App business.”
He added: “Unlike most other companies, every quarter, Block releases a shareholder letter that walks shareholders and analysts through a number of performance metrics tied to its businesses and allows for multiple ways to gauge the health of its segments.”
Hammered by the Hindenburg report, Square stock was down 1.5% in 2023 as of March 24. Block traded near 90, on Feb. 2. Shares plunged about 61% last year.
In its core businesses, Square stock aims to build a two-sided digital payments ecosystem, with products designed for both merchant sellers and consumer buyers. The Square Cash App helps individuals manage money, buy stocks and cryptocurrency, and more.
SQ Stock: International Expansion
“The three initiatives for the Square business are omni-channel, moving upmarket and global expansion,” UBS analyst Rayna Kumar said in a recent note to clients. “Mature international markets including Canada, U.K., Japan and Australia now have return on investment in line with the U.S. Newer markets such as Spain, Ireland and France are still early stage and require more upfront investment from sales and marketing.”
Fourth-quarter earnings for Square stock missed estimates while revenue and gross profit edged by Wall Street targets. But Cash App gross profit growth topped expectations in the quarter.
In addition, Square management outlined a new long-term investment framework, which will put the company on the road to higher quality earnings under generally accepted accounting principles, often known as GAAP.
Also, Block stock recognized a loss on its Bitcoin investments, which totaled $220 million in 2020 and 2021. For 2022, Block recognized a bitcoin impairment loss of $47 million on its investments.
One bright spot: Square holds $5 billion on its balance sheet.
Block Stock: Tough Times For Crypto
In late 2021, Square changed its name to Block, while retaining the ticker SQ. In part, the move reflected the company’s commitment to blockchain technology, which underpins cryptocurrency.
Meanwhile, Bitcoin has rallied during the banking crisis. The price of Bitcoin stood near $28,350 on March 19.
Bitcoin is still down significantly from its high near $68,900 in November 2021. For investors in Square stock, a key question is when the price of Bitcoin will bottom.
Another question is whether SQ stock can rebound even if Bitcoin and crypto continue to struggle. Crypto assets had been under pressure after the FTX bankruptcy.
Block has aimed to build infrastructure that enables bitcoin-based commerce on its merchant platform. In addition, Square created a new business line to help developers build financial services products focused on Bitcoin.
SQ Stock: Cash App Growth One Key
Cash App user growth and monetization is key to the outlook for SQ stock. Cash App growth soared during the coronavirus pandemic amid government economic stimulus. The bearish view is that Cash App growth will slow as the U.S. economy normalizes.
At the Goldman Sachs conference in September, Square said the Cash App now has 47 million monthly active users, up slightly from 44 million at the end of 2021. Younger demographics are expected to remain the predominant source of Cash App user growth.
The company retains the Square brand for merchants that use its point-of-sale technology and services.
At an investor day in May, Chief Executive Jack Dorsey said Block has “an ecosystem of ecosystems” business model.
The strategy is designed to create a positive feedback loop among business units as the company expands, he said. But Square did not provide multi-year guidance on revenues and margins.
In addition, it’s worth noting that Square stock uses a dual class structure of common stock, which gives insiders more voting power.
Square Stock: Move Into ‘Buy Now, Pay Later’
Square on Jan. 31, 2022, closed the acquisition of Australia-based consumer lending startup Afterpay. Its growth has slowed. Further, fintech companies like Afterpay that are “buy now, pay later,” or BNPL, face increased regulation.
Announced Aug. 1, 2021, the Afterpay deal was originally valued at $29 billion. With the big drop in Block stock, the deal was valued at less than $15 billion at closing.
In the emerging BNPL market where Afterpay competes, the players there are encroaching on credit card networks. Apple (AAPL) has emerged as a rival to Afterpay. Another rival of Afterpay is Affirm Holdings (AFRM).
Some investors questioned whether Block needed to buy a company in this sector as opposed to building up its own capabilities or partnering. Competition is heating up in the BNPL market.
Block’s 2022 guidance includes an expected $1 billion in Afterpay operating expenses. UBS analyst Rayna Kumar in a report said the “risk profile” of Afterpay has changed amid rising interest rates and the potential of increased regulation.
Square stock surged in 2020 during the coronavirus outbreak as investors focused on the growth of its consumer Cash App. They shrugged off worries over Square stock exposure to small businesses and restaurants that might close because of the coronavirus pandemic.
Square acquired a majority stake in Jay-Z’s Tidal music streaming service for $297 million in cash and stock.
Block Stock: Competition Heats Up
With multiple products, SQ stock faces stiff competition in both consumer financial apps and the small business market. Rivals include PayPal Holdings (PYPL), First Data‘s (FDC) Clover unit, Shopify (SHOP), merchant acquirers, and well-funded startup Stripe.
Square disclosed a new $170 million investment in Bitcoin in early 2021 on top of its $50 million purchase in October 2020. The company reports Bitcoin holdings as unrealized gains on investments, and they will be excluded from adjusted earnings, analysts say.
The company also is interested in developing a Bitcoin hardware wallet.
Cash App users are able to buy, hold and sell Bitcoin. Square’s adjusted revenues from Bitcoin are sales to app users, minus the cost of purchasing the digital currency.
But Square’s Bitcoin business has gross profit margins of only around 2%, analysts say.
Square Stock: Payments Ecosystem
For merchants, Square makes credit-card readers that plug into mobile devices. Its Square Capital division provides loans to sellers. While Square retains only 10% of Square Capital loans on its balance sheet, there’s still a risk of defaults.
The Square Cash App, a peer-to-peer money-transfer service, competes with PayPal’s Venmo, Zelle and others.
Amid the coronavirus pandemic, Cash App emerged as a digital alternative to traditional banks. Consumers used the Cash App’s direct-deposit feature to receive government stimulus payments, for example.
Square is testing a short-term borrowing feature for Cash App users. Square offers loans of $20 to $200. Cash App users are expected to pay pack the loans in four weeks, with interest.
Also, the Cash App provides a stock trading feature. Cash App offers a debit card through a deal with Marqeta.
The bearish view is that Cash App’s momentum proves transitory with low customer retention after the coronavirus pandemic eases.
Block Stock: Moving Upmarket To Bigger Sellers
With roots in serving such micromerchants as food trucks and farm-stand vendors, Square has moved “upmarket,” targeting larger businesses.
SQ stock ranks among the top 10 fintech companies. Bigger fintech companies include Visa (V), Mastercard (MA), PayPal, Fidelity National Information Services (FIS), Fiserv (FISV) and American Express (AXP).
In addition to selling credit-card readers, Square provides software for point-of-sale and back offices in order to manage inventory and other tasks.
Square recently focused on software products that can be used across many industries, such as invoicing, payroll and marketing. It also aims to integrate its payment tools into e-commerce platforms.
SQ Stock Fundamental Analysis
Square earnings for the quarter ending Dec. 31 were 22 cents per share on an adjusted basis, down 21% from the year-earlier period. Analysts had projected earnings of 30 cents a share.
Also, Square said net revenue rose 14% to $4.65 billion, including Cash App transactions for digital cryptocurrency Bitcoin. SQ stock analysts had predicted revenue of $4.62 billion.
Financial analysts also view gross profit as a key metric for SQ stock. Gross profit came in at $1.66 billion, up 40%, vs. estimates of $1.63 billion.
Cash app gross profits grew 64% year-over-year to $848 million.
For full-year 2023, Square forecast earnings before interest, taxes, depreciation and amortization, a key metric known as EBITDA, of $1.3 billion vs. estimates of $1.296 billion.
“For 2023, SQ intends to limit headcount growth to 10%, down from 46% last year,” Evercore ISI analyst David Togut said in a note. “Management also intends to find ways to leverage its real estate footprint.”
In the fourth quarter, gross payment volume from merchant customers rose 14% to $48.6 billion, missing estimates of $55.35 billion.
Is Square Stock A Buy Or Sell Right Now?
The relative strength line, the blue line in the chart above, compares a stock’s price performance with that of the S&P 500. A downward-trending RS line tells you the stock is underperforming the general market.
Block stock holds an IBD Composite Rating of 58 out of a best possible 99.
SQ stock, meanwhile, has an Accumulation/Distribution Rating of D-plus. The rating runs from a best-possible A+ to a worst-possible E. The rating analyzes price and volume changes in a stock over the past 13 weeks of trading.
As of March 24, SQ stock has no valid entry point. Square stock needs to form a new base to be actionable.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on artificial intelligence, cybersecurity and 5G wireless.
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