- Block (SQ) stock traded at a premium to other transaction processors through most of 2021
- A hard fall since October has eliminated the premium
- Bitcoin (BTC-USD) is behind the argument for the premium returning
Block (NASDAQ:SQ) stock was a pandemic-era star.
SQ stock’s price rose rapidly during the first year of the pandemic. It held its value through most of 2021, even while other transaction processing stocks fell.
The stock’s luck finally ran out in October. But the drop from $250 to a little over $100 was just slightly overdone. Block was due to open April 1 at about $136.70, a market capitalization of about $81.2 billion on 2021 revenue of $17.6 billion.
Before investing, it’s good to ask why the premium existed and whether it’s still deserved.
|SQ||Block (formerly Square)||$133.14|
SQ stock won its premium price on growth, and growth prospects.
Block’s revenue doubled from 2019 to 2020. It nearly doubled again in 2021.
The company began in 2009 with a one-price strategy for small merchants, and a dongle that let them take credit cards on a mobile phone. It then expanded into loans for its business customers, backed by the data it was collecting. Then launched its Cash App, becoming a fintech that even let customers buy stock and use cryptocurrency.
What it lacked, compared with companies like Fidelity National Information Services (NYSE:FIS), which remained in merchant processing, were big profits. FIS earned $417 million on revenue of nearly $13.9 billion in 2021. Block earned $166 million on revenue of $17.6 billion.
For the quarter ending March 31, analysts are now expecting Block will lose about $60 million or 13 cents/share on revenue of $4.13 billion. Bears saw a no-growth stock that wasn’t making money and put in sell orders.
Blockchain to the Rescue?
Most analysts have stayed with Block stock, believing growth will resume and, with it, the company’s premium valuation. There are 31 following it at Tipranks and 27 say you should buy it.
Truist Financial (NYSE:TFC) analyst Andrew Jeffrey says his optimism lies in the company’s name change. Square became Block last year to reflect CEO Jack Dorsey’s renewed focus on blockchain applications. Blockchain encrypts transaction records on a general ledger and is at the heart of cryptocurrencies like Bitcoin.
Jeffrey likes some new Cash features, like direct deposit. He also likes Block’s adoption of Buy Now Pay Later (BNPL), through the acquisition of Afterpay announced last year.
The stock’s fall coincided with disenchantment over other BNPL plays, like Affirm Holdings (NASDAQ:AFRM). Block said 98% of its BNPL loans were repaid last year and total loan losses increased just .08% from the first half to the second.
The bullish argument, which Goldman Sachs (NYSE:GS) echoed in a recent note, is that Block is investing in growth and will be far more than a transaction processor. Instead it will become a global bank and brokerage, a 21st century version of Charles Schwab (NASDAQ:SCHW).
The Bottom Line on SQ Stock
Growth is a risky business. When growth slows for a company like Block, the stock price is likely to take a hit.
Bitcoin also carries enormous risk. Over the last year it has traded for as little as $31,000 and for as much as $66,000.
A close look at Block’s most recent quarter found that nearly half its revenue came from Bitcoin, on which it made a profit of under $50 million.
This tells me that Block has not only gone beyond merchant processing, but beyond banking and brokerage too.
If you believe in Bitcoin, you should believe in Block stock. If you don’t, then you should avoid it. The latter folks should stick to finance stocks like Schwab or online banks like SoFi (NASDAQ:SOFI). Personally, I don’t believe in Bitcoin.
The lesson is that before you invest don’t just look at growth rates or even profit margins. Look at how the company you’re investing in makes its money and decide accordingly.