Nobody’s perfect, right? As much work as we put into our research, through fundamental analysis, momentum, technicals, sector analysis and management discussion, we make mistakes. We have a solid track record, but sometimes we blow it.
We were wrong about Block, Inc. (NYSE: SQ) stock, formerly Square. We were bullish in the 200s, and stopped and stopped again, with some short-term trades that worked. From an investment perspective, the stock has fallen from all the bullish analysis we have provided. It’s really embarrassing for us. We work too hard on your behalf to be wrong. But, unfortunately, we were wrong, and in this column we discuss some of the things that have been bullish, can shift to a bearish outlook, explaining, in part, the price action.
Combination of reasons
How did it happen? It was a combination of things. First of all, the valuation was exorbitant. Then the momentum collapsed. Then the NASDAQ all but crashed, and in 2022 inflation became widespread, hurting consumer confidence, while crypto also fell. Every area in which Block operates has faced headwinds. This includes Bitcoin (BTC-USD) on the balance sheet. This includes the pain that small businesses are feeling due to rising input costs and increased labor expenses. The company has seen its revenue skyrocket, but earnings are lacking, which means there’s no bottom until investors figure out where to value this thing. The inconvenience was disgusting and people got hurt.
Despite these realities, the long-term outlook remains positive. It’s true. Even though the bears were in full control. It is a true fintech disruptor. Even with the horrendous stock market action, the company continues to grow strongly and move more towards profitability in a sustainable manner. These are real facts. But, the action was horrible. We really turned bullish when the action moved to $80-90, but here we are again down 20% from those levels. It was awful. And we were wrong on this one.
Would not bail out the stock
Although we were wrong, when we look at the whole picture, stocks look decently valued at $60. If you held out that long, we wouldn’t be bailing out now. Fresh money can consider a stab. Rising rates have made borrowing costs and debt more expensive to have on the books, so technology remains under pressure.
Is all hope lost? No. Every time we covered it, there were reasons for optimism. But the whole landscape deteriorated and deteriorated. The bears have won this battle. But the war is not over. The company does a lot of good things and this is an opportunity to own this disruptive name. It is speculative given the action. It really is an excellent trading stock. Trading is what we do. But investors, you have been crushed. It’s a long game, but for now, it’s tough. When the company announced that it was facing strong short-term interest, and still is. The macro situation is what crushed the title the most. Bitcoin’s fall hurt, and that will impact future reports. But he recently had some positive things to say.
The company fell short of estimates in the recently released quarter. Keep in mind that revenue has really taken off since cryptocurrency trading was introduced to the platform a few quarters ago. With the fall of the crypto, the block stock has been decimated. Right now it’s really bad because Bitcoin has been crushed, and Block owns a lot of it. Yet in the recently announced quarter, net revenue was $3.96 billion, down 22% year over year. It was lack versus consensus. Excluding Bitcoin transactions, total net income in the first quarter was $2.23 billion, up 44% year-over-year. Crypto weighs. Pull bitcoin chart and block. It is revealing.
Still excluding crypto, the business is growing so well. All lines of business are doing well, but fear of recession is also weighing heavily as it could hurt cash apps and small business transactions. Transactions increased in the last quarter, even though inflation was on the rise, and the consumer was pinched. Transaction revenue was $1.23 billion, up 28% year-over-year, while gross profit was $514 million, up 19% from last year. quarter of the previous year. Overall, gross profit was $1.29 billion, up 34% year over year, and that’s solid. It’s strong, contributing to strong headline numbers even if they missed out, but volumes are a key metric to watch. Volumes were better than expected, up from a year ago. Block processed $43.5 billion in GPV, up 31% year-over-year. Gross profit based on transactions as a percentage of GPV was 1.18%, down 12 basis points year-over-year, but still solid. Again, the trend was slightly lower. We were wrong.
The fact is that the bears could be validated if we see the next report showing that trades have fallen. It will be horrible if these numbers are low. We know crypto is down, but we don’t have transaction acumen. Keep that in mind. This also applies to subscription revenue. During the quarter, we also saw strong strength in subscription and services revenue. Those revenues reached $960 million, while gross profit was $764 million, up 72% year over year and more than 20% from the sequential quarter. It was a good result, but we wonder if the growth will continue in the next quarter or two. That might be the bottom process, though.
If consumer confidence slows, it could impact small business spending
Make no mistake, Cash App was a winner for Block. Cash App generated $2.46 billion in revenue while generating $624 million in gross profit. Bitcoin was a big part of that. With the fall of Bitcoin, the interest decreases. It could really hit revenue in the next report, and a quarter or two. It should be noted that Bitcoin price was a bit weak in Q1 and only got worse in Q2. That remains to be seen, but the value of Bitcoin on the balance sheet has certainly fallen a lot. Although price volatility contributes to trading revenue, the company has a lot of Bitcoin on its balance sheet. The company is heavily invested in Bitcoin.
While revenue is in growth mode and the business is generally posting positive profits, expenses are increasing. Expenses may be lower if income is lower, but that also remains to be seen. Another problem is that operating expenses have increased and outpaced revenue gains, which is not good for long-term growth. Maybe all the bad news is almost integrated. Most stocks have priced in a recession. Operating expenses were $1.52 billion, up a massive 70% year over year. The net loss was actually $204 million, but excluding investment losses and stock revaluations, EPS was a gain of $0.18. It’s good to be in positive territory, but can the company stay there? We think it will be difficult unless there is a ton of support from small businesses.
The trading trends highlighted in the letter to shareholders showed that April was decent. Square GPV is expected to grow 29% year over year. In April, management expected Cash App’s gross profit to increase on the back of growth in monthly active transactions. However, things in May and June really got worse on a large scale when you look at gas and food prices. Inflation data is poor. We think you may see signs of this in Block’s next report.
We were wrong about Block stock, formerly Square. We’ve been bullish on several occasions, and apart from a few short-term trades that worked, investors were hammered. Now, with crypto collapsing and with consumer confidence waning under high inflation, we could see some of the extreme growth slowing down a bit this quarter and next. However, it remains a real disruptor. But for the stock to drop so much, it’s embarrassing for us, yet the company continues to innovate and grow revenue. If the crypto rebounds, Block will too. If recession is averted, the stock will likely rise. The long-term story remains intact.