Where Will Jack Dorsey’s Stock Be In 1 Year?

Following a solid growth period with a consumer-focused approach and constant innovation, Block, Inc. (NYSE:SQ) has been going through a rough patch over the last couple of years. Growth initiatives have backfired, leading to bottom-line losses and investor disappointment.

Block rose to prominence as a leading name in the financial technology space with its top-notch offerings, such as Square, an ecosystem of commerce solutions for sellers, and Cash App, which enables a range of consumer financial services.

In 2022, the enterprise reported an overall loss of $540.75 million as expenses from product development and other growth initiatives weighed on margins. The consistent decline in net income has dampened investor enthusiasm, causing Block shares to tumble significantly.

Nevertheless, management has implemented cost-cutting measures through layoffs in a bid to streamline operations and boost efficiencies. This approach seems to be showing positive results with last quarter’s results showing improvements, so is it time to buy?

What Is Causing the Recent Surge in Share Price?

Block shares have rebounded thanks to the latest quarterly report and guidance elevating investor sentiment.

Management seems to be refocusing on its two main businesses while also engaging in cost-cutting efforts. There is little doubt that Block is well-equipped to deliver explosive growth if the company can manage expenses and strengthen core operations.

The first signs of this parallel effort paying dividends can be seen in SQ share price recently, which has gained significantly since the company posted its fourth-quarter results on February 22, 2024, and registered to a 52-week high of $87.52 a few weeks later.

Following recent gains, it is trading at 24.68x non-GAAP forward earnings, which appears expensive compared to industry peers. However, this valuation is about 80% lower than the 5-year average of 122.22x.

The stock’s relatively modest valuation to historic norms is clearly evident in its non-GAAP forward price-earnings-to-growth of 0.59x, indicating that the company’s earnings growth prospects are yet to be reflected in its price.  

Also, the stock is currently trading at 2.02x forward sales, which is about 20% lower than its sector average.

If it continues to showcase operational efficiencies and cost-effectiveness, higher valuations are likely to be enjoyed by current shareholders.

Record High Gross Profit Margin

The company has demonstrated solid improvement in the last reported quarter, reflecting the effectiveness of management’s turnaround strategy in delivering a significant improvement across key profitability metrics.

Block’s gross profit grew by 22% from the year-ago quarter to $2.03 billion in the fourth quarter of 2023. Square’s contribution to gross profit was $828 million, indicating an 18% year-over-year rise, while Cash App grew by 25% year-over-year to $1.18 billion.

Although operating loss was $131 million, adjusted operating income was $185 million. Net income attributable to common stockholders was $178 million. Adjusted EBITDA doubled from a year-ago to $562 million.

Also, adjusted EBITDA for the year came in at $1.79 billion, indicating a record-high 24% margin on gross profit. In fact, the company ended the year with an adjusted free cash flow of $515 million, compared with a negative $346 million reported in the prior year.

Bitcoin Surge Helped Block

Apart from turning profits, the company saw steady customer growth over the year. At the end of 2023, Cash App had 56 million monthly transacting actives, marking a 9% year-over-year increase. Moreover, Cash App Card monthly actives increased by 20% year-over-year to 23 million in December.

Furthermore, Block has benefitted from the increase in bitcoin’s price. As of December 2023, the company held around 8,038 bitcoins worth $340 million.

Moreover, it reported that Bitcoin gross profit generated by Cash App for the last quarter increased by 90% year-over-year to $66 million, while total bitcoin sales amounted to $2.52 billion.

The company issued optimistic guidance for the current year, projecting at least $8.65 billion in gross profit, indicating a 15% year-over-year growth.

It raised adjusted EBITDA guidance to at least $2.63 billion from the prior $2.4 billion, signaling continued profitability. Adjusted operating income for the year is expected to come in at about $1.15 billion compared to the previous guidance of $875 million.

Block is focusing on driving profitable growth and management is strategizing to increase engagement and integrate payment solutions while continuing its cost-reduction agenda.

The 12,000 Limit Keeps Costs Under Control

Firstly, in the third quarter 2023 shareholder letter, the company declared its cost-cutting strategy by implementing a cap on the headcount at 12,000 as it optimizes resources.

On the other hand, the company is focusing on creating a dynamic model aimed at serving a diversified audience and increasing the total addressable market.

It has worked on restructuring Afterpay, which has struggled significantly, and building a more integrated relationship between Square and Cash App to enhance customer experiences.

In the current year, Block expects Cash App to deliver faster growth than Square. The company has outlined a growth strategy for Cash App to capture a percentage of households with up to $150,000 yearly income in the United States. Furthermore, management believes Square’s growth will be attributed to integrated payments and banking.

Is Block Undervalued?

According to 42 analysts, Block is undervalued by 13.6% relative to its fair value price target of $89.22 per share. 

The stock has recently been upgraded by many analysts with raised price targets. The breakdown of Buy, Sell, Hold ratings among analysts is as follows: 29 recommend buying it while the rest rate it as a Hold.

While the declining bottom line has been a concern that has eroded investors’ confidence, management has taken decisive actions to cut costs and grow the top line.

With its structured plan to boost revenues and customer acquisition, Block is likely to enjoy accelerated growth in the coming years. Although the exposure to crypto might lead to volatility, it is expected to be a long-term winner. As such, Block stock offers an attractive reward to risk ratio at this time.

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.