Block (SQ +1.51%) stock rallied 7% on Feb. 24, just ahead of its fourth-quarter earnings report. It posted better-than-expected numbers after the market close, and shares have gained another 33% since the release.
But even after that big jump, the stock remains more than 55% below its all-time high of $289.23, which it hit last August. Should investors consider accumulating some shares of this fintech company today?
Image source: Block.
How rapidly is Block growing?
During the fourth quarter, Block's revenue rose 29% year over year to $4.08 billion, which beat analysts' expectations by $20 million. Bitcoin revenue, which is generated from the Cash App, increased 12% to $1.96 billion. That marked a significant slowdown from the segment's dizzying 889% growth in the prior-year quarter.
However, Cash App's transaction and service-based revenue still rose 45% and 41%, respectively, to a combined total of $590 million, as more people used its peer-to-peer payments, Cash Card, and stock-trading tools. The Cash App also reached 44 million monthly active transacting users at the end of 2021, up 22% year over year.
Block's transaction-based revenue from Square's seller ecosystem increased 41% to $1.21 billion as more businesses reopened in a post-lockdown market. That marked a major acceleration from its 6% growth a year ago. Square's subscription and services revenue more than doubled to $230 million, while its hardware revenue -- which might face fresh competition from Apple in the near future -- rose 47% to $36 million.
Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) dipped 1% to $184 million. Its adjusted earnings per share (EPS) fell 16% to $0.27 but still beat analysts' estimates by $0.05.
Block's margins have mainly been squeezed by higher investments in its ecosystem, its overseas expansion efforts, and fresh marketing campaigns. The rapid growth of Block's Cash App platform, which operates at lower margins than Square's Seller platform, is exacerbating that pressure.
What's next for Block?
For the full year, Block's revenue rose 86% to $17.66 billion. Adjusted EBITDA jumped by 114% to $1.01 billion, which boosted its total adjusted EBITDA margin from 5.0% to 5.7%. Adjusted EPS surged 104%.
Most of that growth came from Block's robust Bitcoin sales in the first half of the year, which cooled off significantly in the second half as the cryptocurrency's price declined. However, the post-lockdown recovery of Square's Seller business cushioned that blow, highlighting Block's diversified and balanced business.
Block didn't provide any specific top-line guidance for 2022, but it expects adjusted operating expenses to rise $2.3 billion as it ramps up investments and integrates the Australian "buy now, pay later" (BNPL) platform Afterpay into the Cash App and Square ecosystems. Excluding Afterpay, it expects operating expenses to rise about 38%.
The analyst consensus puts revenue growth at 11% in 2022. However, adjusted EBITDA is set to decline 13% as the company grapples with rising expenses. In 2023, Wall Street expects revenue growth to accelerate to 23% as adjusted EBITDA surges 61%.
We should take those estimates with a grain of salt, since a lot of Block's growth is still pinned to Bitcoin's volatile prices. Tougher competition in the digital-payments and BNPL markets from PayPal, Affirm, and other rivals could also impact its trajectory.
The valuations and verdict
Based on that outlook, Block initially looks like a bargain trading at 3.9 times this year's sales. For reference, PayPal and Affirm trade at a respective 4.4 and 9.0 times 2022 revenue.
However, Block loses its luster when taking into account its enterprise value-to-EBITDA multiple of 76, especially when management expects to endure a year of heavy spending before generating stronger bottom-line results in 2023. It will also likely bleed red ink on a GAAP basis throughout 2022, which could make it a tough stock to own as rising interest rates punish unprofitable companies.
NYSE: SQ
Key Data Points
Block has a lot of long-term growth potential, but it doesn't seem like a particularly compelling investment in this difficult market. Its growth will decelerate significantly this year, its margins will contract, and it still commands a premium valuation. Investors might want to check out other more promising fintech plays before chasing Block's post-earnings rally.
