Block, Inc. (NYSE:SQ) stock is still trying to find its footing, but recently started to rally off its lows. Despite falling after the just reported quarterly earnings, we think the stock is just getting started in its recovered. In the very short-term, we are still in an uptrend here. This is a stock that our members have traded long and short numerous times. We continue to have a long bias on this stock, and have had that bias the last few quarters. The stock has meandered along, but has been great for short-term trading, particularly for those hopping in and out of options. That said, the association with Bitcoin (BTC) has caused Block pain, but a recent rally has been beneficial at least in Q2. Payment volumes remain relatively strong. The fintech payments company is in growth mode, but earnings have not justified the valuation, and the pace of growth has stalled, which has kept a lid on prices. However, a lot is going right for the company, and there remains many avenues for growth. We think you can buy the earnings dip for a profitable trade in the $60s. Let us discuss.
Block’s Q2 headline results
In Q2, revenue was $5.53 billion, and this was growth of 25.4% year-over-year. While revenue was up, it was expected to grow some from last year. That said, the 25.4% growth was a big beat versus consensus estimates by $430 million. Along with revenue growth, Block in our opinion has done well to control expenses, and as such it has seen improvement in profit power.
Like in Q1 of this year, it appears all lines of business are performing well, and overall, gross profit was $1.87 billion, which was up 27% year-over-year, and up 10% from Q1 2023. Transaction revenue grew markedly despite the macro pressure from rates, signaling the economy continues to be strong.
Revenues from transactions grew in Q2
Block, Inc. revenue from transactions was $1.64 billion, rising 11% year-over-year, while gross profit was $687 million, up 15% year-over-year. This is strong growth, but is slower than years past. Volumes were better than expected, rising sharply from a year ago. Block, Inc. processed $59.01 billion in GPV up 12% year-over-year. Services-based revenue increased to $1.46 billion, which was up 34% from last year. Further, gross profit was $1.18 billion, up 34% year-over-year.
Cash App Q2 results
Cash App generated $3.56 billion of revenue and $968 million of gross profit in Q2, and this stellar revenue result was a 36% increase from last year while gross profit rose 37%. Bitcoin was decent in Q2, and rose in value. Once again, the volatility in bitcoin does help with trading revenue, but the company has a good amount of exposure to bitcoin on its balance sheet, as it owns a lot of bitcoin. Bitcoin contributed $2.39 billion in revenue. Cash App generated $1.03 billion of subscription and services-based revenue, up 43% year over year
Earnings power
Block was unprofitable for many quarters. There are still concerns on a GAAP basis, but on an adjusted basis Block is routinely profitable. As we saw, there is strong revenue growth, but on the whole, earnings are still kind of light, but earnings are improving, and valuation has been coming back to earth.
Block needs to continued growing earnings for valuation to be really attractive. But operating expenses are still rising, yet not as much as they used to in the past when revenues would surge. Here in Q2, operating expenses were $1.50 billion adjusted, rising 15% year-over-year. These expenses, while expanding, are not expanding as fast as revenue growth and that has led to stronger income potential. This is evidenced by the ballooning adjusted EBITDA figure over time, which rose from last year’s $187 million. It came in at a strong $384 million. Adjusted EPS was $0.39, beating consensus by $0.02. The company beat on the top and bottom line, handily, but shares fell. This comes as it raised guidance, but the excuse was that GPV was not strong enough. We view this as a bad beat, and one that can be bought up.
Looking ahead for Block
As we look ahead to the full year 2023, we now expect $1.60-$2.00 in EPS; this puts Block, Inc. stock at a still pricey but more reasonable ~ 35X FWD EPS at the midpoint. Valuation has improved. We expect revenue growth continues and are targeting $21-$22 billion in 2023. The reason we see EPS improving is the controlling of the operating expenses. Adjusted EBITDA is now projected at $1.5 billion, rising from $1.36 billion previously forecast. We rate Block, Inc. a buy here.
So what do you think?
Whether you are one of our successful traders in our membership service or a casual reader of Seeking Alpha, we would love to hear from you. Do you think that a beat and raise justified a selloff? Are you buying? Are you playing options here? Is the stock overvalued? Let the community know below.
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