Anticipation is building for Block(NYSE: SQ) to report its third-quarter earnings (for the period ended Sept. 30) on Nov. 7. Despite strong, profitable growth from the financial technology (fintech) leader over the past year, the stock has likely frustrated investors, down 5% in 2024. The upcoming update will be Block's chance to convince the market its recent operating and financial momentum can keep going.
Let's explore a few reasons why shares of Block could make a good addition to your portfolio.
Fintech leader generating profitable growth
Block stands out as a fintech pioneer and payments industry innovator driving the ongoing digitization of global commerce and banking.
The opportunity for the company's Square and CashApp ecosystems to gain an expanding slice of an estimated $205 billion addressable market highlights a significant runway. Segments like mobile payments, digital banking, buy now, pay later (BNPL) commerce, and peer-to-peer transfers are still seen as being in the early stages of a secular tailwind.
Maybe the most important development for Block this year has been a clear shift toward more consistent profitability. Efforts to control costs and generate financial efficiencies are proving successful, with an expectation for further gains as the platforms scale.
Image source: Getty Images.
Q3 earnings preview for Block
For the third quarter, Block has guided for a headline 17% year-over-year increase in the gross profit while forecasting $695 million in adjusted earnings before interest, tax, depreciation, and amortization (EBITDA), accelerating by 46% from last year.
Those headline numbers are objectively positive but also mark a gradual slowdown compared to even stronger rates in the first half of the year. That dynamic may explain some of the weakness in the stock price in the last several months. By this measure, it will be important for Block to meet or exceed its Q3 targets as a step in building confidence in the market that its financial strategy is working.
Several trends underpin a long-term outlook, including Block's ability to leverage its multiproduct platform.
With Square, the company is seeing a multiyear transformation as sellers adopt more products and contribute to higher recurring revenue streams. From the Cash App segment, the 57 million active user base has become more engaged with the mobile app by utilizing more services, including the Cash App card, direct deposits, and borrowings. The Afterpay BNPL solution has also been a growth driver, covering 24 million active consumers. Even Block's exposure to the crypto market is in its favor, considering the price of Bitcoin is near a record high. The market will want to see evidence Block is increasingly monetizing these opportunities.
A key monitoring point this quarter will be the adjusted operating margin against the company guidance estimate of 14%. While moderating from the 18% result last quarter, balancing ongoing technology investments and marketing needs, the forecast also represents a sharp improvement compared to just 5% in Q3 2023.
The big picture is that Block is making good progress toward its goal of achieving the "Rule of 40" by 2026, as a measure of the sustainability in profits for a software company. In this case, the sum of the gross profit growth and adjusted operating margin expected at 31% for Q3 and 35% for the full year, is well on track to reach the 40% benchmark level, possibly ahead of schedule.
Comments by management projecting optimism this quarter could be the catalyst for the stock to rally higher. On this point, Block stock is trading at just 14 times its consensus full-year EBITDA estimate as an enterprise value (EV)-to-forward-EBITDA multiple. With the valuation premium narrowing over the last two years amid improving earnings, Block looks to me as offering compelling value with an outlook for the company that is as strong as ever.
SQ EV to EBITDA (Forward) data by YCharts
Decision time: Bullish on Block stock
I believe shares of Block deserve a buy rating. The stock price has an upside into 2025 as the core business is well positioned to keep growing and ultimately reward investors. Recognizing the inherent unpredictability of earnings with the risk that disappointing results force a reset of expectations, Block can be a good option for investors with a long-term time horizon in a diversified portfolio.
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Dan Victor has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Block. The Motley Fool has a disclosure policy.
