Square Looks Cheap Ahead of Earnings, But is the Stock a Buy?

Valued at a market cap of $44.4 billion, Block (SQ) is a fintech company that offers a wide range of products and solutions to individuals and businesses. Formerly known as Square, it changed its name to Block in 2021. Today, it serves clients and customers in the U.S., Canada, Japan, Australia, Ireland, France, Spain and the U.K. 

The company's portfolio of products includes Square, which helps sellers efficiently run and grow their businesses, providing an integrated ecosystem of commerce solutions, business software, and banking services; Cash App, an online payment platform where you can send and receive money instantly; TIDAL, a platform for musicians to create content and experiences for their fan base; and TBD, an open developer platform that makes it easier to access Bitcoin (BTCUSD) and other blockchain technologies without an intermediary. 

Down 75% from its all-time highs, set in 2021, Block stock has trailed the broader markets in the last three years. Ahead of its Q3 earnings report, set for release after the close this Thursday, Oct. 7, let’s see if SQ stock can stage a rebound and deliver outsized gains to shareholders.

What Does Wall Street Expect from Block In Q3?

A company's earnings report is often a key short-term catalyst for share prices, and Block is scheduled to report its Q3 results this Thursday night. Analysts covering Block expect it to report revenue of $6.24 billion and adjusted earnings per share of $0.87 in Q3 of 2024. 

In the year-ago period, the company reported revenue of $5.61 billion and adjusted earnings of $0.55 per share. So, while its revenue is forecast to grow by 11%, earnings estimates are much higher, indicating growth of 58.2% year over year in Q3. 

Like other growth stocks, Block has focused on lowering its cost base to boost the bottom line. Earlier this year, Block significantly reduced its employee count following a round of layoffs last December. As a result of these cost-cutting measures, Block raised its 2024 guidance for gross profits, operating income, and earnings. 

In Q2, Block reported revenue of $6.16 billion and adjusted earnings per share of $0.93. The results were mixed, as analysts were looking for revenue of $6.28 billion and earnings of $0.84 per share in the quarter.

Block increased its gross profit by 20% year over year, a metric that analysts closely watch as it represents a more accurate measurement of its core transactional businesses. Block's Cash App segment is a major contributor to its bottom line. The mobile payment platform ended Q2 with a gross profit of $1.3 billion, up 23% year over year. The monthly active users for the Cash App Card increased 13% to over 24 million in Q2. 

What's the Bull Case for Block Stock?

Block is a fintech company that continues to grow steadily. It has projected its total addressable market at $205 billion, providing the entity with enough runway for future growth. The company is part of several growth verticals that include mobile payments, digital banking, and “buy now, pay later” following its Afterpay acquisition. 

A tough macro environment has forced Block to sacrifice growth for profitability, which makes the stock all the more attractive right now. In the first six months of 2024, Block has reported a free cash flow of more than $900 million. If the company ends 2024 with a free cash flow of $1.8 billion, it trades at just 24.4x free cash flow, which is reasonable.

Analysts tracking SQ stock expect adjusted earnings to expand from $1.09 per share in 2024 to $4.56 per share in 2025. Priced at 16x forward earnings, Block stock trades at an attractive valuation right now. 

Out of the 38 analysts covering SQ stock, the consensus is a “moderate buy,” and the average target price is $87, indicating an upside potential of about 19% from current levels.

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On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.