Block, Inc. (NYSE:SQ) stock continues to struggle despite the market rallying most of 2023 until this current week. The association with Bitcoin (BTC-USD) has caused Block pain, but a recent rally has been beneficial. Block, Inc. is a services company, and a fintech. It is in growth mode, but earnings have not justified the valuation.
The macro situation is precarious. The Fed is still raising rates to slow the economy on purpose. We still have rampant inflation. We also expect consumers to tighten their belts in coming months as the rate hikes have their effects and recession signs build more. Still, Block remains a solid company.
With that said, lets discuss the Block, Inc. just-reported quarterly earnings.
Block’s Q1 headline results
In Q1, revenue was $4.99 billion, and this was growth of 26% year-over-year. While revenue was up, it was expected to grow some from last year. That said, the 26% growth was a nice beat versus consensus estimates by $390 million. On top of the growth in revenue, the company once again managed to control expenses, and as such it has seen improvement in profit.
All lines of business are still performing well, and overall, gross profit was $1.71 billion, which was up 32% year-over-year. Transaction revenue grew markedly despite the macro pressure from rates. So far, the economy remains on fire.
Revenues from transactions grew in Q1
Block, Inc. revenue from transactions was $1.42 billion, rising 15% year-over-year, while gross profit was $602 million, up 16% year-over-year.
There is no doubt that this is solid growth, but the pace of growth has slowed markedly from years past. However, these transaction metrics show that there is still a strong economy despite the Fed’s actions to slow activity. Volumes were better than expected, rising sharply from a year ago.
Block, Inc. processed $51.12 billion in GPV up 17% year-over-year. Services-based revenue increased to $1.37 billion, jumping 42% from last year. Further, gross profit was $1.10 billion, up 42% year-over-year.
Cash App Q1 results
Cash App generated $3.27 billion of revenue and $931 million of gross profit in Q1. This helped with the top line beat. This $3.27 billion was a 33% increase from last year while gross profit rose 49%. With such a profit increase it shows expenses to generate revenue we well managed. We should point out that Bitcoin was volatile, again, in Q1, but rose in value. Once again, volatility does help with trading revenue, but the company has a good amount of exposure to bitcoin on its balance sheet, as it owns a lot of bitcoin.
Bitcoin contributed $2.16 billion in revenue. If you back out bitcoin and buy now, pay later (“BNPL”), Cash App revenue was up 52% to $1.1 billion.
Earnings power
Keep in mind that for many quarters, Block did not turn a profit. There are still concerns on a GAAP basis, but on an adjusted basis Block is EPS profitable. There is strong revenue growth, yet still little to no earnings, but earnings are improving. Block has to expand earnings for valuation to be really attractive. But operating expenses are still rising, yet not as much as they used to in the past when revenues would surge. Here in Q1, operating expenses were $1.72 billion, rising 13% year-over-year. These expenses were at a lower pace than gross profit growth and revenue growth. That is a positive. Net loss was $17 million, while EPS was a loss of $0.03.
Adjusted EBITDA widened from last year’s $195 million. It came in at a strong $368 million. Adjusted EPS was $0.40, beating consensus by $0.06 . This was a result of a revenue beat and well-controlled expected expenses. So, overall, the stock is still around 50X earnings for 2023. Much less expensive than the heights of 2021-2022, but this is still expensive. However, Block, Inc. stock seems to have found a base of support at $50-$60 by and large.
Other valuation metrics suggest Block, Inc. stock remains attractive. On a price to sales basis we are at 1.8X, which is attractive, and the price to book is 2.0X. Further EV/sales remain relatively attractive at 1.8X.
Looking ahead for Block
As we look ahead to the full year 2023, we now expect $1.50-$2.00 in EPS; this puts Block, Inc. stock at a still pricey but more reasonable ~ 34X FWD EPS at the midpoint. Valuation has come in nicely. We expect revenue growth continues and are targeting $20-$21 billion in 2023. The reason we see EPS improving is the controlling of the operating expenses. While the macro situation is unnerving, small business is still doing well, and transaction volume is going up. We believe Block, Inc’s growth remains strong. We rate Block, Inc. a buy here.
So what do you think?
Whether you are one of our successful traders in our membership service or a casual reader of Seeking Alpha, we would love to hear from you. Do you think Block has put in its bottom? Do you think bitcoin prices really matter for the stock? Are you bearish or bullish? Do you prefer another fintech competitor stock?
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