Block Has Limited Upside Given Analysts’ Tepid Earnings Forecasts

Ever since Block, Inc. (NYSE:SQ), formerly known as Square, released its earnings for Q3 on Nov. 4, its stock has been in a free fall. As of Nov. 3, it was $252.48, but by Friday, Jan. 7, SQ stock closed down $110.90 to just $141.54. That represents a decline of 43.9% in just over 2 months.

That’s not a very welcome response by the market. In fact, this is close to the lowest point it’s been in the past several months. One thing is for sure, analysts and the market are very sanguine about the company’s prospects.

Markets might be looking for a reason to believe that revenue and earnings will dramatically rise. But without some sort of catalyst, it’s possible that SQ stock could be stuck in the doldrums for a while.

Where Things Stand With Block

One reason for the stock’s difficulties could be analysts’ much lower revenue growth foreseen for 2022. For example, the average revenue estimate for 2022 taken by Seeking Alpha’s survey of 34 analysts is $18.7 billion, or just $1.08 billion over estimates for $17.62 billion for 2021. That works out to a paltry growth rate of just 6.1%.

The same is true with Yahoo! Finance’s estimates, using Refinitiv survey data of 35 Wall Street analysts. Their average revenue forecast for 2022 is $18.8 billion, or just 6.7% over the $17.62 foreseen for 2021.

Keep in mind that this is quite a letdown from prior years. For example, in 2021, using analysts’ $17.6 billion revenue estimate, sales will be over 85% higher than the $9.5 billion in 2020.

In other words, revenue growth is decelerating significantly from 85% down to just about 7% in 2022. That doesn’t lead to a higher stock price.

You can see why SQ stock is now down so much in the past two months. In essence, the market is reassessing its view of the company’s prospects and valuation going forward.

Moreover, the market is also waiting to see how much its acquisition of Australian company Aftermarket, will cost. Block expects to close the deal in Q1 or early Q2. But whether the in-store layaway payment company will really contribute free cash flow to the bottom line is yet to be seen.

What SQ Stock Is Worth

Assuming that Aftermarket closes sometime in Q1, analysts foresee that earnings (EPS) this year will hit $1.87 per share. This is from Seeking Alpha’s survey of 38 analysts’ earnings estimates.

The problem is this is just 10.65% over the existing EPS forecasts for 2021 of $1.69. In addition, Yahoo! Finance’s survey (actually Refinitiv’s data) is for $1.86 per share in 2022 or just 10% over the 2021 EPS estimate of $1.69.

In other words, analysts don’t foresee very high sales growth or fast earnings growth this year.

So why does the stock have a forward price-to-earnings (P/E) of 76 times? This is seen by dividing Jan 7’s price of $141.54 by $1.86 EPS estimates for 2022. A stock trading at 76 times earnings should at least have prospects of very high sales and or growth rates.

But that is not the case here. In other words, the market is trying to create SQ stock for a period of lower growth. It probably does not deserve to have 77 times forward P/E multiple.

Normalized Valuation

For example, Morningstar Research has a page showing that the forward P/E ratio for SQ stock over the past five years has been much lower. In 2017, it was 87 times, and for the next four years it’s been 77x, 67x, 185x, and 79x. The average of these five years is just 99x forward earnings. And that includes an outlier, highly skewed year in 2020 pushing it twice as high as normal.

The normalized metric for the past five years forward P/E (dividing the 2020 number by half) is just 81 times. Therefore, this implies that SQ stock should be worth 81 times the $1.86 EPS forecast for 2022. That works out to $150 per share.

This is just 5.9% over today’s price of $141.54 per share. In other words, SQ has a little bit of upside, but not very much.

On the date of publication, Mark Hake 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.

Mark Hake writes about personal finance at mrhake.medium.com and Newsbreak.com and runs the Total Yield Value Guide, which you can review here.