After hitting lows in October not seen since the onset of the pandemic, fintech all-star Block (SQ -0.49%) has rallied 11% higher, overcoming worries about the meltdown happening all across the cryptocurrency space.

Yet shares of the payments leader are still down 62% in 2022, and there is the prospect of a recession hitting early next year. Inflation and energy prices remain high despite recent pullbacks, and the Federal Reserve is still raising interest rates to show it remains hawkish on rising prices and costs.

Block's business is sensitive to the economy, so it's not surprising to see the market giving mixed signals about the stock. Let's see whether the fintech stock has run its course for the time being or it can still move higher.

Couple performing contactless transaction.

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Adding a third leg to stand on

Block has long relied upon sellers using the Square payments ecosystem for its tremendous growth over the past decade, but more recently it has seen remarkable growth in its peer-to-peer mobile payments app Cash App.

In the third quarter where point-of-sale profits jumped 29% to $783 million, Cash App gross profits surged 51% to $774 million. It ended the period with 49 million users and a record $52 billion of inflows.

And now Block has a new avenue for potential growth: buy now, pay later (BNPL) specialist Afterpay, which it acquired for $29 billion earlier this year. Although still facing a complex integration process, Block looks for the BNPL leader to serve as a bridge for commerce between Square and Cash App. Not only does Cash App allow users to pay Square sellers, but the addition of Afterpay can add BNPL to the mix, giving Block a better opportunity to reach a wider audience.

A measure of growing risk

But Block does face significant competition in BNPL. Apple launched Pay Later, Walmart recently announcing it would be entering the market, and PayPal has Venmo, the peer-to-peer cash transfer leader.

And that's in addition to a potential economic downturn. Higher interest rates and fewer borrowing opportunities, especially for lower-income households, could lead to greater delinquencies. Morning Consult found earlier this year that 33% of BNPL users in January had overdrafted their bank accounts.

In a supplement note Block filed in November, it said that after acquiring Afterpay in January it changed the policy on delinquent accounts to write off bad BNPL loans after 180 days instead of 90 to allow people to keep spending on their loans. Some 17% of its BNPL loans are delinquent as of Sept. 30, compared to 15% at the end of June, but perhaps more worrisome is that the number of loans that are 90 days or more delinquent now has surged 57% over the last three months. 

Woman holding head looking at bills.

Image source: Getty Images.

A cash money opportunity

However, Block continues to be bolstered by the potential offered for further expansion from Square, which is seeing increased subscription-based revenue growth, while Cash App is enjoying a massive uptake by users utilizing the app's instant transfer capabilities. That should allow Block to add to the margin growth it is witnessing.

Deutsche Bank analyst Bryan Keene views Cash App as Block's "potential sleeping giant" that could thrust gross profits above 20% a year. He thinks it could become a digital wallet on the scale of Alibaba's Alipay or Tencent's WeChat in Asia. 

Indeed, Wall Street remains quite bullish on Block despite the headwinds a recession could present. Almost 90% of the 37 analysts covering the stock have a buy rating on the stock with a $115 per share price target on it, implying 60% upside in the stock. It could triple in value if the high end target of $210 per share is hit.

No need to rush

Even with the drop in Block's price, though, it's still not trading at a discount. Shares go for about 2.3 times sales and nearly 44 times next year's earnings. While I think Block is an excellent long-term play, the BNPL market adds some risk if a recession hits, and we're seeing consumers having more difficulty paying now before any official declare has been made. It's also closely tethered to Bitcoin, which has lost over 60% of its value this year.

So as much as I like Block going forward, I'd be hesitant to buy here. In short, you haven't missed the boat and there's still time to wait for better pricing to offset the increased risk.