Block: It's Time To Double Down As The Market Capitulates
Summary
- Block stock fell steeply yesterday as the market took the negative cues from payments leader PayPal's performance, resulting in a broad risk-off move toward its peers.
- However, the market unjustifiably discounted Block's robust Q2 execution and upgraded guidance, demonstrating Block's remarkable operating leverage gains.
- The selling intensity provides a fantastic buying opportunity for dip-buyers as weak holders fled, resulting in SQ falling back to highly attractive levels.
- I make the case why SQ holders shouldn't fear the market's pessimism and should consider capitalizing on its valuation dislocation. I also highlight the critical levels for investors to watch.
- Read on to assess whether you concur with my Strong Buy thesis.
- Ultimate Growth Investing members get exclusive access to our real-world portfolio. See all our investments here »
Phillip Faraone
Block, Inc. (NYSE:SQ) investors were stunned yesterday (August 4) as SQ followed payments leader PayPal (PYPL) into a steep selloff, underperforming the broad risk-off sentiments in the market.
Even though CEO Jack Dorsey and his team reported a robust report with raised guidance, the market focused on PayPal's gross margin challenges. In a recent PayPal article, I presented why market operators remain unsure how to value PYPL and its peers, resulting in a potential valuation dislocation opportunity.
SQ's premium valuation (rated by Seeking Alpha Quant with a "D-" grade) suggests that solid execution and a strong outlook will always be expected. As such, Block didn't disappoint, seeing robust gains across its business segments in Q2.
Notably, the company posted a 27% YoY gain in gross profit, lifting its adjusted EBITDA to $384M, marking a 105% YoY growth. As such, Block demonstrated its remarkable ability to improve operating leverage, as it also reported $25M in adjusted EBIT.
Promising growth recovery was observed in Square and Cash App as the company expanded its vertical POS penetration. Banking products also posted robust growth, up 24% YoY, accounting for 19% of its segment gross profit.
On the consumer side, monthly transacting actives or MTAs remain solid, reaching 54M, up 15% YoY. It's also ahead of Q1's 53M, suggesting the worst is likely over. As such, it helped to drive Cash App's gross profit up by 37% YoY.
With such a strong performance as the US and global economy demonstrated remarkable resilience, I believe we should expect Block's recovery to continue moving forward.
As such, management upgraded its FY23 adjusted EBITDA outlook to $1.5B, suggesting a 51% YoY increase. Therefore, it corroborates my conviction that Block remains early in its profitability runway, with further upside as the company increases its attach rates and cross-selling opportunities.
The revised Wall Street consensus estimates indicate an adjusted EBITDA CAGR of 36.2% from FY22-25, justifying its premium valuation. Seeking Alpha Quant's growth grade of "A+" (the best possible) suggests that valuing SQ as one of the leading growth stocks seems appropriate.
As such, it seems surprising that the market was indiscriminate in its selling fervor yesterday, as it de-risked PYPL and its peers with a sharp selloff. However, my price action analysis suggests that SQ's forward valuation multiples are back within the attractive zone, considering its growth potential.
Accordingly, SQ's FY25 multiple has dropped to 15.3x, suggesting that the market has discounted significant pessimism against SQ's growth opportunities. However, the market's failure to give credence to Square's solid execution and robust guidance provides another golden opportunity for buyers who missed SQ's previous lows.
SQ price chart (weekly) (TradingView)
SQ could find dip buyers returning to support this week's decline at the $61.5 level. Defending that zone is critical to sustain its nascent recovery from its October 2022 lows.
Given how SQ buyers had defended its previous significant dips in March and May, this week's selloff likely took out recent momentum/breakout buyers as SQ fell back to its late June levels.
After such a steep decline, dip-buying investors waiting for a fantastic pullback opportunity must be prepared to capitalize and not be struck by fear.
Rating: Maintain Strong Buy. Please note that a Buy rating is equivalent to a Bullish or Market Outperform rating.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.
We Want To Hear From You
Have constructive commentary to improve our thesis? Spotted a critical gap in our view? Saw something important that we didn’t? Agree or disagree? Comment below with the aim of helping everyone in the community to learn better!
A Unique Price Action-based Growth Investing Service
- We believe price action is a leading indicator.
- We called the TSLA top in late 2021.
- We then picked TSLA's bottom in December 2022.
- We updated members that the NASDAQ had long-term bearish price action signals in November 2021.
- We told members that the S&P 500 likely bottomed in October 2022.
- Members navigated the turning points of the market confidently in our service.
- Members tuned out the noise in the financial media and focused on what really matters: Price Action.
Sign up now for a Risk-Free 14-Day free trial!
This article was written by
Ultimate Growth Investing, led by founder JR Wang of JR Research, helps investors better understand a range of investment sectors with a focus on technology. JR specializes in growth investments, utilizing a price action-based approach backed by actionable fundamental analysis. With a powerful toolkit, JR also provides insights into market sentiments, generating actionable market-leading indicators. In addition to tech and growth, JR also offers general stock analysis across a wide range of sectors and industries, with short- to medium-term stock analysis that includes a combination of long and short setups. Join the community today to improve your investment strategy and start experiencing the quality of our service.
Seeking Alpha features JR Research as one of its Top Analysts to Follow for the Technology, Software, and the Internet category, as well as for the Growth and GARP categories.
JR Research was featured as one of Seeking Alpha's leading contributors in 2022.
About JR: He was previously an Executive Director with a global financial services corporation and led company-wide, award-winning wealth management teams consistently ranked among the best in the company. He graduated with an Economics Degree from Asia's top-ranked National University of Singapore (NUS). NUS is also ranked among the top ten universities globally. I currently hold the rank of Major as a Commissioned Officer (Reservist) with the Singapore Armed Forces.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of SQ, PYPL either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.