BSQKZ - Block Just Hit A Home Run

2023-11-30 09:00:00 ET

Summary

• Block, Inc. expects to become GAAP profitable in 2024 and has seen strong cash flow generation and improved free cash flow.
• Jack Dorsey's return as head of Block is seen as a positive driver for the stock.
• Block reported blowout earnings, raised guidance, and announced a $1 billion stock buyback program, leading to a spike in the stock price, and I remain bullish.

Block Buy Thesis Executive Summary

Block, Inc. (SQ) is a turnaround growth play. The stock has been out of favor for quite some time. I consider SQ stock a speculative buy.

Block Long-term Chart

Block just reported blowout earnings

According to the recent Block earnings press release, the company is projecting to become GAAP profitable in 2024. Cash flow generation has been strong and improving. Adjusted free cash flow was $427 million in the last quarter, compared to $88 million in the prior quarter. What's more, free cash flow has improved considerably. For the last 12 months, "adjusted free cash flow was $945 million, up from negative $99 million in the prior period."

Block expects 2024 to be the strongest year for profitability yet. This is based on expectations for "significant margin expansion as they work on cutting costs and improving growth." Block expects to:

"achieve profitability on a GAAP operating income basis in 2024 and deliver $875 million in adjusted operating income, up approximately 4 times compared to 2023."

On top of this, they expect to "deliver $2.4 billion in adjusted EBITDA, an increase of more than 40% to 2023." Hopefully, they will achieve these goals.

These are lofty goals, yet, Jack is back! With Jack Dorsey back and solely focused on Block, I say the odds are " Ever in Block's favor, " as Effie Trinket would say in the Hunger Games movie! I have an $83 12-month price target, implying 32% upside from the current level. Let's now take a deeper dive into the latest earnings results, share buyback program, and forward guidance.

Seeking Alpha SQ's latest earnings summary

Block recently reported blowout Q3 earnings and upped guidance . Moreover, SQ stock is still trading at drastically below its 52-week high of $89.

What Jack had to say...

Jack is back! Jack Dorsey is back in charge of Block. I believe this may be a huge driver for the stock going forward in and of itself. Jack stated on the conference call:

"We believe we will reach Rule of 40 in 2026, with an initial composition of at least mid-teens gross profit growth and a mid-20% adjusted operating income margin."

The rule of 40 calls for a software company's combined revenue growth and profit margin to meet or exceed 40%. Furthermore, Block announced a robust stock buyback and upped guidance for 2024.

Block announces $1 billion stock buyback program and ups 2024 guidance

Block recently posted better-than-expected Q3 results and announced a $1 billion stock buyback program. What's more, Block initiated 2024 guidance for $2.40B of adjusted EBITDA, exceeding the estimate of $1.94 billion, and adjusted operating income of $875M. I like the focus on prioritizing shareholder return going forward as well. Chief Operating Officer and Chief Financial Officer Amrita Ahuja stated on the call:

"Lastly, I wanted to touch on capital allocation and our focus on prioritizing shareholder return. As we progress towards Rule of 40 in the coming years, we expect our margin profile and free cash flow generation to improve, which means we can return more to shareholders over time. Today, we are announcing an initial share repurchase program of $1 billion, which will offset a portion of dilution from share-based compensation and allow us to act opportunistically when we believe our shares are undervalued. We consider share-based compensation in our financial targets as we measure our progress towards Rule of 40, and we want to be responsible in managing the impact of dilution as our company grows."

Below are the earnings highlights.

Block Earnings Highlights

According to Seeking Alpha news:

• 2023 adjusted EBITDA is reaffirmed at $1.50B, Visible Alpha consensus of $1.52B, adjusted operating income at $25M.
• Q3 gross payment volume of $60.1B, missing the $61.1B Visible Alpha consensus, rose from $59.0B in Q2 2023 and $54.4B in Q3 2022.
• Q3 adjusted EPS of $0.55, topping the average analyst estimate of $0.46, rose from $0.39 in Q2 and $0.42 in Q3 2022.
• Q3 total net revenue of $5.62B, beating the $5.43B consensus, rose from $5.53B in Q2 and $4.52B in Q3 2022.
• Transaction-based revenue of $1.66B increased 9% Y/Y, compared with the 11% Y/Y growth in the prior quarter.
• Cash App generated $3.58B of revenue in the quarter, rising from $3.56B in the previous quarter and $2.68B a year ago. Cash App gross profit of $983.9M climbed from $968.0M in the prior quarter and $774.5M a year earlier. Excluding bitcoin revenue, the unit's revenue was $1.16B, up 26% Y/Y and compared with $1.16B in Q2. Buy Now Pay Later contributed $129M of revenue and $94M of gross profit to Cash App in Q3.
• Cash App had 55M monthly transacting actives at Sept. 30, 2023 vs. 54M at June 30. Inflows per transacting active were $1,132, up 8% Y/Y. CashApp generated $45M in bitcoin gross profit, up 22% Y/Y. Bitcoin revenue of $2.42B climbed 37% Y/Y.
• The Square ecosystem generated $1.98B of revenue in Q3 compared with $1.93B in Q2 and $1.77B in Q3 2022. Square gross profit, meanwhile, increased to $899M from $888M in Q2 and $783.0M in the year-ago quarter. BNPL contributed $129M of revenue and $94M to Square's gross profit.
• Q3 non-GAAP operating expenses of $1.44B fell from $1.50B in the previous quarter and rose from $1.26B a year ago.
• Q3 adjusted EBITDA of $477M vs. $384.4M in the previous quarter and $327M a year earlier.

Seeking Alpha Block Forward EPS Estimates

There were several analyst upgrades and price target adjustments after the earnings report as well.

Recent Positive Block Analyst Calls

Several analyst upgrades occurred post-earnings. According to Seeking Alpha news (emphasis added):

"Investors cheered Block's outlook for $2.4B in adjusted EBITDA in 2024 and achieving Rule of 40 goal in 2026, pushing the payment fintech's stock up 12% in midday Friday trading. Under the so-called Rule of 40 concept, the company's gross profit growth and adjusted operating income margin adds up to 40.

Block (( SQ )) expects gross profit margin growth at least in the mid-teens and a mid-20% adjusted operating income margin in 2026. As usual, Wall Street analysts weighed in on the outlook and Q3 results.

Truist: Analyst Andrew Jeffrey, with a Buy rating on the stock thinks Block has hit cycle lows and is encouraged by the company's guidance.

"Although we think Square faces heavy lifting to reaccelerate GPV growth, as it moves up market into complex merchants, we sense a renewed sense of urgency," he wrote. Meanwhile, Jeffrey expects its Cash App platform to continue impressive monetization, driving gross profit upside "as Block (( SQ )) pulls its two ecosystems closer, increasing monetization."

J.P. Morgan: Tien-tsin Huang, with an Overweight rating on the stock, liked management's plan to produce "meaningful operating leverage" and Chairman Jack Dorsey's direct tone on addressing its structural issues that had been slowing decision-making, especially on the Square side of its business.

"To us, this felt like a turning point in messaging and strategy, with management drawing hard lines around growth, headcount (12k cap from 13k today) and profitability, checking many boxes on our wish list to unlock value," the analyst wrote. During Block's earnings call, Dorsey said it's focusing "a lot more on getting products and features to our sellers and to our Cash App customers much, much faster." Huang agrees: "With Dorsey now in place as the head of Square, we're expecting to see an improvement in product velocity and collaboration across ecosystems."

Morgan Stanley: James Faucette kept his rating on the stock at Equalweight but increased his price target to $55 from $69 , giving Block credit for hitting its targets.

"While investors have plenty of reasons to be skeptical of the targets, including decelerating growth in both segments and Seller volume growth that is well below the 15% level, Faucette sees opportunity for company, especially as its Cash App becomes more bank-like. "Even Square seller business's gross profit has significant contribution from bank-like revenue streams, as Seller Banking (ex PPP) contribution to overall Seller gross profit has grown to 19% from 18% in 3Q22 and 14% in 3Q21," he wrote."

There were a substantial number of upward earnings revisions in the last 3 months as well.

Annual Estimates Revisions

Upcoming Fiscal Year End - Revisions for Last 3 Months .

The primary factor for the purchase is the fact Block's growth metrics are improving greatly. The Seeking Alpha Quant team Growth Grade is an A+.

Seeking Alpha Growth Metrics - Grade A+

Now let me tie a bow on this Holiday gift.

The Wrap Up

Jack is back and 100% focused only on Block. The company is currently firing on all cylinders. What's more, the stock is still trading closer to the 52-week lows than highs. With Block initiating a stock buyback program, upping guidance, and crushing last quarter's earnings, I see this as an excellent time to open a position. I would layer in at this point due to the fact the stock has run up significantly as of late. I actually bought in at a lower level, yet still feel there is much more upside to come. The stock is in an extremely strong technical position presently, despite the recent run.

The stock has broken through major overhead resistance at the 50 and 200 Day SMAs at this time. One last note. There is some exposure to Bitcoin as well. According to Blockworks:

"Block’s investment holdings of BTC remain roughly unchanged, and the company reports a cumulative total of $220 million in bitcoin as of the close of the third quarter. That aligns with its reported fair value of $216.5 million."

Nonetheless, I see this as another potential positive surprise in the making though. If BlackRock ( BLK ) gets SEC approval to launch a Bitcoin ( BTC-USD ) ETF, this should provide another tailwind for the stock.

Nevertheless, I am still categorizing Block, Inc. stock as a speculative growth holding. I would layer in over-time in several tranches if you don't already hold a position. Those are my thoughts on the matter, I look forward to reading yours.

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