Even if Block Beats on Earnings, Stay Away From SQ Stock
Between macro uncertainty and this year’s banking crisis, it’s no surprise that fintech stocks like Block (NYSE:SQ), after performing poorly in 2022, have continued to underperform thus far in 2023. Despite this, some may be confident that a boost for SQ stock is just around the corner.
That is, the company, which owns digital financial platforms such as Square and CashApp, is just about to report its earnings for the preceding quarter.
While the jury is out whether Block is more likely to beat or miss on earnings/guidance, I’ll admit that a post-earnings rally is well-within the realm of possibility.
However, I wouldn’t view this as a reason to buy, whether ahead of, or after, the upcoming earnings release. Mostly, due to a myriad of issues and concerns. As I will detail below, these could apply additional pressure on shares down the road.
| SQ | Block | $60.79 |
A Post-Earnings Pop is Possible
Post-market on May 4, Block will report its fiscal results for the quarter ending March 31. Last quarter, this fintech reported mixed results. Earnings fell short of expectations, but revenue slightly exceeded expectations. Yet while the report was mixed overall, the market focused on the positive aspects.
Besides the revenue beat, another key positive was CashApp’s reported gross profit growth during the quarter. With this focus on the positives, SQ stock experienced a post-earnings pop rather than a drop.
A similar scenario could play out with the forthcoming earnings release, especially when you consider the aforementioned macro uncertainty.
While the sell-side on average has upped its forecasts for last quarter’s earnings over the past three months, expectations aren’t exactly high. If the company merely meets expectations, it may drive a moderate post-earnings rally.
I wouldn’t buy the stock ahead of earnings. Nor would I buy after earnings, on the expectation that well-received quarterly results signal a continued comeback is in the cards.
Again, many potential risks loom. These include a large alleged one that was recently publicized in a “short report” issued by a prominent short-selling research firm.
Why Block Still Isn’t a Buy
On March 23, Hindenburg Research dropped a scathing critique of SQ stock. The report focused mainly on issues with the company’s CashApp unit. The report accused Block of not only overstating user growth but als of understating user acquisition costs for CashApp.
In addition, the report also alleges that CashApp has become a hotbed of fraudulent and illegal activity, and that Block has not been lax with compliance measures.
SQ shares plunged following the release of the short report. The company’s response to the allegations helped to temporarily pare losses, but the stock has pulled back yet again.
Hindenburg’s allegations have not been proven. However, they have raised concerns about increased regulatory scrutiny of CashApp.
That was a key factor behind KBW analyst Steven Kwok’s downgrade of SQ, issued on April 10. Kwok lowered his rating from “Outperform” to “Market Perform,” and lowered his price target from $90 to $75 per share.
Alongside the CashApp regulatory concerns, Kwok cited the other major negatives that could affect Block’s performance going forward.
Rising competition across its platforms, for one. Also, concerns related to the company’s Afterpay segment. The “buy now, pay later” platform could be adversely affected by a continued economic downturn.
The Takeaway
Given the numerous risks at hand, there’s ample uncertainty with SQ shares today. Sure, sometimes situations with high uncertainty can be strong opportunities. However, that’s only if uncertainty has pushed a stock to a discounted valuation.
That’s clearly not the case here with Block. Shares today trades for 35 times forward earnings. The prospect of high continued earnings growth may to some extent warrant this valuation compared to other large, profitable peers.
Still, it’s possible the market is too confident the company will meet/beat this forecast. The current economic slowdown may cause worse-than-expected results later this year, and into 2024. Even a mild recession could have an outsized impact on Afterpay’s performance.
Taking all of this account, there’s only one clear takeaway. Whether before or after earnings, holding off on SQ stock is your best move.
SQ stock earns a D rating in Portfolio Grader.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
