In 2023, a multitude of technology stocks have demonstrated impressive performance, primarily as a result of the excitement surrounding the development of artificial intelligence technology. However, Square’s parent company, Block (SQ), and its stock have fallen further and further behind this upward trend.
There are a number of aspects that go into the operation of the digital payment processor Block that contribute to its lackluster performance. In the first place, there are some worries regarding the growth trajectory of Square’s consumer Cash App. There are also things to think about in terms of the impact of the cryptocurrency Bitcoin, the acquisition of AfterPay, and the potential impact of a recession in the economy of the United States.
In addition, Square is coming up against increased competition from a variety of different directions, with the well-funded startup Stripe emerging as one of its primary competitors. The company is already dealing with a number of challenges in the market, and the competition is making those challenges even more difficult.
So far in 2023, Square stock has gone up by 2%.
Square’s earnings and revenue for the June quarter exceeded expectations, but there was a slight miss in gross payment volume from merchant customers. As a result, SQ stock experienced a sell-off due to concerns raised by management regarding business trends.
In March, short-seller Hindenburg Research released a report alleging that Square had inflated Cash App user metrics, adding to the company’s challenges.
Amid growing worries about a potential U.S. recession, one crucial question is how well Square can withstand a business downturn. Analysts point out that the relatively lower income levels of Square’s customer base could be a significant factor for investors to consider if the U.S. economy weakens.
Fears of Recession in SQ Stock
The primary objective of Square is to establish a comprehensive digital payments ecosystem that serves the needs of both consumer buyers and merchant sellers. Their primary businesses are centered on the development of a two-sided platform that can serve both of these constituencies. The Square Cash app is geared toward individual users and provides access to a variety of financial services including portfolio management, trading in stocks and cryptocurrencies, and more.
On the other hand, a number of investors have voiced their concerns regarding the possible flaws that exist in Square’s point-of-sale business. This is primarily the result of an intensifying level of competition from businesses such as Toast (TOST) in the restaurant industry and the Clover unit of Fiserv (FISV) in general.
Other platforms on the market, such as PayPal’s Venmo, Zelle, and other services that are analogous to Square’s Cash App compete with Square’s Cash App because it enables peer-to-peer money transfers.
The management team at Square has recently implemented a new long-term investment framework with the objective of achieving higher quality earnings in accordance with generally accepted accounting principles (GAAP).
In spite of this, there is a silver lining, as Square has a sizable $5 billion in its cash and investments, which provides the company with robust financial support. In addition, the company uses a dual-class structure for its common stock, which gives company insiders greater voting power than other shareholders.
Block Stock: Hard Times for Cryptocurrencies
In the latter half of the year 2021, Square underwent the process of changing its name to Block, whereas the ticker symbol for the company remained the same: SQ. The firm’s unwavering commitment to blockchain technology, which serves as the basis for many different cryptocurrencies, was the impetus behind this rebranding effort.
Bitcoin experienced a surge in value during the crisis that engulfed the banking industry. However, it is important to note that Bitcoin’s value is still quite a bit lower than it was during its all-time high in November 2021, which was close to $68,900.
On its merchant platform, Block has been making significant progress toward constructing the infrastructure required to support bitcoin-based transactions. In addition, Square has launched a new business line that assists developers in the process of developing products for the financial services industry that center on Bitcoin.
Cash App Growth Is One Key to SQ Stock
The expansion of Cash App and the company’s ability to turn a profit are critical factors that will determine the future of SQ stock. As a result of the government’s efforts to stimulate the economy during the pandemic, Cash App’s business experienced a significant surge in growth. On the other hand, there are views that are pessimistic and suggest that this growth could slow down as the economy of the United States returns to normal.
Square has maintained the Square brand for its merchant-focused point-of-sale technology and services throughout the company’s history.
Jack Dorsey, the Chief Executive Officer of Block, spoke at an investor day in May 2022 and highlighted the company’s “ecosystem of ecosystems” business model. As the company grows, the goal of this strategy is to foster both growth and synergy within the organization by establishing a positive feedback loop between the various business units as the company expands.
Move into “Buy Now, Pay Later,” says Square Stock.
On the 31st of January, 2022, Square was able to successfully complete the acquisition of Afterpay, a consumer lending startup located in Australia. Afterpay’s growth, on the other hand, has been slowing down recently, and the “buy now, pay later” (BNPL) industry, in which it operates, is coming under increased regulatory scrutiny.
The acquisition of Afterpay was initially estimated to be worth $29 billion when it was announced on August 1, 2021. However, as a result of a significant decline in the value of Square’s stock, the final value of the transaction, which occurred around $15 billion, was significantly lower than expected.
Afterpay is up against competition from other players in the fiercely competitive BNPL market, such as Apple and Affirm Holdings. Some investors have questioned whether or not Square needed to acquire a company in this sector in order to develop its own capabilities or form partnerships. Instead, they believe that Square should have focused on developing its own capabilities.
The guidance that Square has provided for 2022 includes an anticipated expenditure of one billion dollars related to Afterpay. Afterpay’s risk profile is evolving, as a result of factors such as rising interest rates and the possibility of increased regulation, as pointed out by an analyst at UBS named Rayna Kumar.
Due to the widespread adoption of Square’s Cash App among consumers in the year 2020, the company’s share price experienced a sizeable increase during the coronavirus epidemic. Concerns that Square’s exposure to small businesses and restaurants that could be impacted by the pandemic were disregarded by investors.
In addition, Square made a significant move into the music streaming industry by purchasing a majority stake in Jay-Z’s Tidal for a total of $297 million in cash and stock. This acquisition was a significant step for Square.
Block Stock: Competition Picks Up
The stock market for consumer financial apps as well as the market for small businesses is extremely competitive, and Square’s stock (SQ) competes against many strong competitors in both of these markets. Other merchant acquirers, including Shopify (SHOP), PayPal Holdings (PYPL), First Data’s Clover unit (FDC), and the well-funded startup Stripe are all major competitors of Stripe.
Credit card readers that can be plugged into mobile devices are one of the services that Square provides to merchants. This makes it easy for businesses to accept payments via credit card. In addition, the Square Capital division offers loans to merchants, which further supports the expansion of those businesses.
During the outbreak of the coronavirus epidemic, Square’s Cash App became an increasingly popular digital alternative to conventional banking services. Consumers have begun using the Cash App for a variety of financial dealings, including the receipt of government stimulus payments through the app’s direct-deposit feature.
Some pessimistic viewpoints, on the other hand, suggest that the momentum gained by Cash App during the pandemic might not be sustainable, with concerns about low customer retention once the pandemic has passed.
Moving upmarket to bigger sellers in block stock
BSquare initially catered to smaller businesses such as food trucks and vendors at farm stands; however, the company has since expanded its target market to include larger companies, moving “upmarket” over time.
SQ stock has proven to be worthy of its position as one of the top 10 fintech companies in the sector. Visa (V), Mastercard (MA), PayPal, Fidelity National Information Services (FIS), Fiserv, and American Express (AXP) are some of the most prominent companies operating in the financial technology sector.
In addition to providing businesses with credit card readers, Square also offers software solutions for point-of-sale and back-office management. These solutions give companies the ability to handle tasks like inventory management in an effective manner.
In recent months, Square has been concentrating its efforts on the development of software products that can serve customers in a variety of industries, such as tools for marketing, payroll, and invoicing. Additionally, the company intends to integrate its payment tools into e-commerce platforms in order to further expand the scope of the products and services it provides.
A fundamental analysis of SQ stock
The company Square had a strong financial performance in the quarter ending in June, with earnings increasing by an impressive 116% to 39 cents per share, which was higher than the estimated 36 cents per share. The company’s net revenue increased by 26% to $5.53 billion, surpassing analysts’ projections of $5.1 billion in total revenue.
Gross payment volume, which is the total dollar value of transactions processed through Square’s platform, saw a significant 40% increase to $54.2 billion, which is slightly below the projected $54.5 billion. Cash App, which is Square’s popular consumer finance app, saw its gross profit increase by 37%, reaching $968 million, which was higher than the estimated $935 million.
In spite of this, Square’s overall gross profit growth slowed to 27%, or $1.87 billion, compared to the 32% growth it experienced in the prior quarter. The management team forecasts that growth will moderate even further in the third quarter, coming in at 21%.
The number of active monthly users of Cash App reached 54 million as of the June quarter, representing a slight increase from the 53 million seen in the preceding quarter’s numbers.
Earnings Before Interest, Taxes, Depreciation, and Amortization (also known as EBITDA) for the company skyrocketed by 105% to $384 million, easily beating the estimate of $297 million.
Square has projected that it will have an adjusted EBITDA of $1.5 billion for the year 2023. This includes the $87 million that it surpassed its forecast for the June quarter. Earlier projections from analysts anticipated a full-year EBITDA of $1.36 billion.
Should you buy or sell Square stock right now?
IBD Stock Checkup reports that Square’s Relative Strength Rating is currently at 70 out of a possible 99 points, with 99 being the highest possible score. In general, RS Ratings of 80 or higher are associated with the stocks that have the best performance.
The price performance of a stock is measured relative to the performance of the S&P 500 by the relative strength line. When the RS line is moving in a downward direction, this indicates that the stock’s performance is not as good as the performance of the market as a whole.
The IBD Composite Rating for Block stock is 84 out of a maximum of 99.
The Accumulation/Distribution Rating for SQ stock is currently sitting at a B as of August 4th. On this scale, an A+ represents the highest possible grade, and an E represents the lowest possible grade. The rating takes into account both the price and volume changes that have occurred in a stock over the course of the most recent 13 weeks of trading.
In addition, the price of SQ stock has reached a cup base entry point of 89.97. However, it is important to note that Block stock trades at a price that is significantly lower than this entry point at the moment.