2023-11-30 09:00:00 ET
Summary
- SQ's well-diversified fintech offerings have directly contributed to its improved cross-selling within its existing active users, while expanding attach rates of its Cash App Card to 40%.
- Combined with the growing adoption for its payment processor offerings for merchants, we are not surprised that the management has raised its FY2023 guidance while offering promising FY2024 numbers.
- As a result of these promising developments, we believe that it is currently trading near its fair value, with an excellent long-term upside potential of $108.
- Combined with the record Black Friday and Cyber Monday weekend performance, we maintain our Buy rating on the SQ stock, since its profitable growth trend appears to be sustainable in the near to intermediate term.
We previously covered Block (SQ) in September 2023, discussing its excellent prospects from the expanded offerings within the Cash App ecosystem, since it had directly triggered cross-selling within its existing active users while improving its cost efficiencies.
Combined with the improved upside potential after the moderate pullback then, we had cautiously rated the stock as a Buy.
In this article, we will be discussing SQ's consistently improving metrics across its profit margins, user acquisition, and stock valuations, with the consensus already rewarding the raised forward guidance with expanded top and bottom line estimates through FY2025.
We shall further discuss why we maintain our Buy rating for the stock, with a raised long-term price target.
The SQ Investment Thesis Remains Robust, Thanks To Its Profitable Growth Trend
For now, SQ has reported another stellar FQ3'23 earnings call, with revenues of $5.61B (+1.4% QoQ/ +24.4% YoY) and adj EBITDA of $477M (+24.2% QoQ/ +45.8% YoY).
Notably, its adj EBITDA margin continues to expand to 8.4% (+1.5 points QoQ/ +1.2 YoY), partly attributed to the management's sustained cost optimizations thus far.
Its somewhat stable operating expenses of $1.44B (-4% QoQ/ +15.2% YoY) is already comprising a smaller portion of its revenues at 25.6% (-1.5 points QoQ/ -2.1 YoY), thanks to the accelerating top-line and its improving operating scale.
SQ's almost eponymous offering, Cash App, recorded 55M monthly transacting actives users as of the latest quarter ( +1M QoQ / +5.5M YoY) as well, with $1.13K in average inflows per user (inline QoQ/ +8% YoY).
Most importantly, its well-diversified and synergistic fintech products have already contributed to its growing attach rates of its Cash App Card at 40% ( +4 points YoY ), with 22M monthly actives (+4M YoY).
We also believe that SQ's Cash App adoption may continue to grow moving forward, especially since it has begun to offer direct deposit from October 2023 onwards.
This allows users to allocate pre-set amounts of their paychecks across its fintech offerings, including savings, loan repayment, stocks, bitcoin, and their stored balance, naturally boosting retention and cross selling.
Interested investors may want to note that Jack Dorsey may have taken a page out of SoFi's playbook ( SOFI ), a high growth fintech that has been offering multiple products across banking, personal/mortgage/student/auto loans, investments, insurance, and even credit cards.
If anything, SQ's focus on the king of decentralized currencies has also paid off, with Cash App generating $45M in Bitcoin gross profits alone (+2.2% QoQ/ +21.6% YoY), increasingly contributing to Cash App's overall gross profits.
This is on top of the growing adoption for its payment processor offerings for merchants, with the management's focus on the software/ integrated payment segment already yielding a gross profit growth of +16% YoY and the vertical point-of-sale solutions yielding a more impressive gross profit growth of +29% YoY.
As a result, we are not surprised that SQ's promising profitability metrics have been reflected in the raised FY2023 adj EBITDA guidance to $1.67B ( +68.6% YoY ) and adj operating income to $215M (+247.8% YoY) at the midpoint.
This is compared to the original numbers of $1.3B (+31.3% YoY) and -$150M (inline YoY) offered in the FQ4'22 earnings call, respectively.
In addition, SQ has also offered a highly promising FY2024 outlook, with adj EBITDA of $2.4B (+43.7% YoY) and adj operating income of $875M (+306.9% YoY), implying that management appears confident of delivering highly profitable growth in the near future.
The Consensus Forward Estimates
Perhaps this explains why the consensus has raised their forward estimates, with SQ expected to generate a top and bottom line growth at a CAGR of +16.4% and +45.5% through FY2025, compared to the previous estimates of +16.1% and +36.7%, respectively.
SQ Valuations
The same has also been reflected in the stock's valuations, with SQ notably growing into its premium FWD EV/ EBITDA of 21.81x and FWD P/E of 33.16x, higher compared to the sector median of 10.83x/ 9.31x, though moderated compared its 1Y means of 27.71x/ 35.21x and 3Y pre-pandemic mean of 69.51x/ 100.15x, respectively.
For now, we believe that the stock deserves the embedded high growth valuation, thanks to the projected expansion of its adj EBITDA margins to 7.6% in FY2023 (+1.9 points YoY). This is based on the management's raised FY2023 adj EBITDA guidance to $1.67B (+68.6% YoY) and the consensus revenue estimates of $21.75B (+24.1% YoY).
Based on the FY2023 adj EBITDA guidance and its latest share count of 611.28M, we are looking at an estimated adj EBITDA per share of $2.73 (+60.5% YoY). Combined with the FWD EV/ EBITDA valuation of 21.81x, it appears that SQ is currently trading near its fair value of $59 as well.
Investors must also remember that SQ manages to achieve this impressive growth, despite the intensifying competition in the fintech industry and the challenging macroeconomic outlook, highlighting its highly sticky offerings and loyal consumer base, as discussed above.
The promising forward guidance has directly resulted in the consensus raised FY2025 adj EBITDA estimates to $3.05B as well, up by +21% from the previous estimates of $2.52B in our previous article, resulting in a higher FY2025 adj EBITDA per share generation of $4.99 from the previous $4.15.
As a result of the raised consensus forward estimates and a similar calculation method as above, it appears that our previous long-term price target of $88.40 is no longer applicable, with us also moderately updating our SQ long-term price target to $108, implying an excellent upside potential of +67% from current levels.
So, Is SQ Stock A Buy , Sell, or Hold?
SQ 5Y Stock Price
For now, SQ has already bounced off the critical support level of $40s, thanks to the highly optimistic FQ3'23 earnings, raised FY2023 guidance, and promising FY2024 numbers.
Combined with the record Black Friday and Cyber Monday weekend performance, we maintain our Buy rating on the SQ stock. Its profitable growth trend appears to be sustainable in the near to intermediate term, with its long-term prospects likely to further lift once the Fed pivots and market sentiments improve.
On the other hand, we recommend some patience for interested investors, since it remains to be seen if the stock may sustain the upward momentum beyond its critical support level of $55 over the next few weeks.
Depending on their risk tolerance and dollar cost averages, bottom fishing investors may consider waiting a little longer, and adding upon a moderate pullback to between $55 and $45. There is no need to chase this rally.
For further details see:
Block: Growing Consumer Stickiness And Attachment Rates Trigger Long-Term Tailwinds