Block SQ has been on a roll, boasting a 47.9% surge in stock price over the past year. This performance outpaces the Zacks Business-Services sector rally of 26.9% and the S&P 500’s return of 31.1%. However, Block hasn’t quite matched the 62.9% growth of its industry peers during the same period.
The driving force behind Block’s success is its strong presence in the digital payments arena. Its robust payment and point-of-sale (POS) solutions, encompassing hardware and software, enable businesses to accept payments, streamline operations, and gain valuable insights. Block’s comprehensive commerce ecosystem empowers sellers to seamlessly integrate software, hardware, and payment services, fostering strong momentum across its seller base.
This positive outlook is tempered by several concerns. Market uncertainties, high inflation, unfavorable foreign exchange fluctuations, and a slowdown in consumer spending are casting shadows over Block’s future. The post-pandemic normalization trend also presents a challenge. This confluence of risks and rewards has investors questioning how best to approach SQ stock.
Block has been gaining traction among sellers across various industries, including food, retail, and services, and in geographies like the United States, Japan, Australia, and Canada. This growth is fueled by its robust product portfolio, which is driving an increase in its Gross Payment Volume (GPV). In the second quarter of 2024, Block processed $61.94 billion in GPV, reflecting a 5% year-over-year increase.
Block’s omnichannel offerings provide sellers with a competitive edge by delivering differentiated customer experiences through customer insights. These offerings allow sellers to manage orders from their POS and eliminate the need for manual aggregation of online and in-person orders.
The momentum across the Square ecosystem and the CashApp ecosystem, which facilitates peer-to-peer payment and digital commercial transaction facilities, is another positive sign.
Block leverages artificial intelligence (AI) to elevate the seller experience. Square Online’s themes and Square for Retail’s AI-generated product descriptions enhance customer engagement and automate sales processes. Square offers generative AI features to sellers, enabling them to automate operations, streamline workflows, and save valuable time.
In the cryptocurrency market, Block is steadily gaining ground thanks to CashApp, which allows users to buy, sell, send, and receive bitcoins. Its decentralized TBD platform, designed for developers to build decentralized finance applications on programmable blockchains, is a significant development. Block’s self-custody bitcoin wallet, Bitkey, further strengthens its presence in the cryptocurrency space. Bitkey is accessible in over 95 countries across six continents, providing users with a secure and convenient way to own and manage their bitcoins.
Block’s Afterpay division and strong partner base are bolstering its prospects in the buy now, pay later (BNPL) market. Notable partnerships include those with Curology, Helzberg Diamonds, Journeys, Rawlings Sporting Goods, and Zenni Optical, all of which enhance the shopping experience for U.S. customers. Afterpay has also collaborated with merchants like Diane von Furstenberg, Diggs, For Eyes, and Kendra Scott to offer installment payments for purchases. Afterpay’s partnership with Rokt, aimed at enhancing the online shopping experience, is another positive development. This collaboration leverages Rokt’s e-commerce solution to provide relevant advertising experiences to targeted customers during the checkout process.
Block’s compelling products and solutions, comprehensive payment ecosystem, and strong position in the digital payment industry are poised to drive its near-term and long-term prospects. For the third quarter of 2024, the Zacks Consensus Estimate for revenues is pegged at $6.17 billion, indicating a 9.8% year-over-year growth. The consensus earnings estimate stands at 88 cents per share, suggesting a 60% year-over-year increase. Over the past 60 days, the estimate has been revised upward by 14.3%. For 2024, the Zacks Consensus Estimate for revenues is projected at $24.52 billion, implying a 11.9% year-over-year growth. The consensus earnings estimate is pegged at $3.60 per share, representing a 100% year-over-year increase. In the past 30 days, the estimate has been revised upward by 0.6%.
Block presents an attractive valuation at current levels. SQ is trading at a discount, with a forward 12-month Price/Sales of 1.58X compared with the industry’s 6.33X. This disparity presents a good opportunity for investors.
However, Block is not without its challenges. Weakening transaction activities on CashApp and a softening trend in consumer spending across food and drink and retail discretionary verticals are concerning. The broader market volatility is acting as a headwind.
Specific challenges include ensuring the security of payments and money transfer in the digital payments industry, and navigating regulatory uncertainties in the cryptocurrency space.
Increasing pricing pressure due to rising competition from companies like PayPal PYPL in the peer-to-peer payments space is another hurdle. Block also faces stiff competition from Affirm AFRM in the thriving buy now, pay later (BNPL) market.
Despite these challenges, Block’s strong solutions portfolio, rising earnings estimates, dominant position in the digital payments industry, and attractive valuation present a compelling investment opportunity. However, macroeconomic uncertainties and unfavorable shifts in consumer spending patterns, which currently surround Block’s prospects, should not be ignored. With a Zacks Rank #3 (Hold), Block appears to be treading a middle ground. Investors would be wise to proceed with caution.
