2023-08-05 10:48:36 ET
Summary
- Block stock fell steeply yesterday as the market took the negative cues from payments leader PayPal's performance, resulting in a broad risk-off move toward its peers.
- However, the market unjustifiably discounted Block's robust Q2 execution and upgraded guidance, demonstrating Block's remarkable operating leverage gains.
- The selling intensity provides a fantastic buying opportunity for dip-buyers as weak holders fled, resulting in SQ falling back to highly attractive levels.
- I make the case why SQ holders shouldn't fear the market's pessimism and should consider capitalizing on its valuation dislocation. I also highlight the critical levels for investors to watch.
- Read on to assess whether you concur with my Strong Buy thesis.
Block, Inc. ( SQ ) investors were stunned yesterday (August 4) as SQ followed payments leader PayPal ( PYPL ) into a steep selloff, underperforming the broad risk-off sentiments in the market.
Even though CEO Jack Dorsey and his team reported a robust report with raised guidance, the market focused on PayPal's gross margin challenges. In a recent PayPal article , I presented why market operators remain unsure how to value PYPL and its peers, resulting in a potential valuation dislocation opportunity.
SQ's premium valuation (rated by Seeking Alpha Quant with a "D-" grade) suggests that solid execution and a strong outlook will always be expected. As such, Block didn't disappoint, seeing robust gains across its business segments in Q2.
Notably, the company posted a 27% YoY gain in gross profit, lifting its adjusted EBITDA to $384M, marking a 105% YoY growth. As such, Block demonstrated its remarkable ability to improve operating leverage, as it also reported $25M in adjusted EBIT.
Promising growth recovery was observed in Square and Cash App as the company expanded its vertical POS penetration. Banking products also posted robust growth, up 24% YoY, accounting for 19% of its segment gross profit.
On the consumer side, monthly transacting actives or MTAs remain solid, reaching 54M, up 15% YoY. It's also ahead of Q1's 53M, suggesting the worst is likely over. As such, it helped to drive Cash App's gross profit up by 37% YoY.
With such a strong performance as the US and global economy demonstrated remarkable resilience, I believe we should expect Block's recovery to continue moving forward.
As such, management upgraded its FY23 adjusted EBITDA outlook to $1.5B, suggesting a 51% YoY increase. Therefore, it corroborates my conviction that Block remains early in its profitability runway, with further upside as the company increases its attach rates and cross-selling opportunities.
The revised Wall Street consensus estimates indicate an adjusted EBITDA CAGR of 36.2% from FY22-25, justifying its premium valuation. Seeking Alpha Quant's growth grade of "A+" (the best possible) suggests that valuing SQ as one of the leading growth stocks seems appropriate.
As such, it seems surprising that the market was indiscriminate in its selling fervor yesterday, as it de-risked PYPL and its peers with a sharp selloff. However, my price action analysis suggests that SQ's forward valuation multiples are back within the attractive zone, considering its growth potential.
Accordingly, SQ's FY25 multiple has dropped to 15.3x, suggesting that the market has discounted significant pessimism against SQ's growth opportunities. However, the market's failure to give credence to Square's solid execution and robust guidance provides another golden opportunity for buyers who missed SQ's previous lows.
SQ could find dip buyers returning to support this week's decline at the $61.5 level. Defending that zone is critical to sustain its nascent recovery from its October 2022 lows.
Given how SQ buyers had defended its previous significant dips in March and May, this week's selloff likely took out recent momentum/breakout buyers as SQ fell back to its late June levels.
After such a steep decline, dip-buying investors waiting for a fantastic pullback opportunity must be prepared to capitalize and not be struck by fear.
Rating: Maintain Strong Buy. Please note that a Buy rating is equivalent to a Bullish or Market Outperform rating.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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Block: It's Time To Double Down As The Market Capitulates