Invest in Block? It's Definitely Tradable

[view original post]

Is it hip to be Block?¬†On Thursday evening Block (SQ) , formerly known as Square, released the firm’s March quarter financial results. Block missed on a number of financial metrics, but did show growth, early Q2 growth, indicating acceleration in the firm’s Cash App. Hence, the stock traded 4% higher overnight, after having sold off some 10.5% on Thursday, only to give that all back once the bell rang.

For the three month period ending March 31st, Block posted adjusted EPS of $0.18 (GAAP EPS: $-0.38) on revenue of $3.960.6B. Both of these top and bottom line results fell short of Wall Street’s expectations, while that revenue print showed a 21.7% contraction year over year. Cost of revenue amounted to 67.3% of total revenue, down from 80.9% for the year ago period. This allowed gross profit to rise 34% to $1.294.9B. Excluding the Afterpay acquisition, gross profit increased 25% to $1.2B.

However, and this gets mildly complex… operating expenses increased 69.9% to $1.521.7B. This dropped operating income from $67.7M one year ago to $-226.8M. This left net income attributable to common shareholders at $-204.2M. Hence your negative GAAP EPS print. Separately, gross payment volume or GPV amounted to $43.5B for the quarter, down from Q4 2021, but up from $33.1B for the year ago comp.

Segment Performance & Outlook

Square Ecosystem

Transaction based revenue increased 29% to $1.124B.

Subscription based revenue increased 133% to $282.7M

Hardware revenue increased 30% to $37.3M.

Revenue increased 42% to $1.444B.

Cost of Revenue increased 42% to $782.4M.

Gross profit increased 41% to $661.2M.

Outlook: For the month of April, in aggregate, Square GPV is expected to be +29% y/y. On a three year CAGR (compounded annual growth rate) basis, GPV growth is expected to be 24% in April, compared to 22% growth for Q1.

Cash App Ecosystem

Transaction based revenue increased 19% to $109.2M.

Subscription based revenue increased 43% to $622.3M

Bitcoin revenue decreased 51% to $1.731B.

Revenue decreased 39% to $2.462B.

Cost of Revenue decreased 48% to $1.839BM.

Gross profit increased 26% to $623.6M.

Outlook: In April, the firm expects Cash App gross profit, excluding Afterpay, to grow on a y/y and CAGR basis, driven by growth in monthly transacting activities, engagement across the ecosystem, and inflows into Cash App.

Balance Sheet

Block ended the quarter with a net cash position of $4.79B and current assets of $11.86B. Measured against current liabilities of $6.03B, Block runs with a current ratio of 1.97, which is very healthy. Total assets add up to $29.13B. That said the entry for “goodwill” stands at $12.43B, and another entry… “net acquired intangible assets” printed at $2.28B. What this means is that total intangible assets add up to $14.71B or 50.5% of total assets. What this also means is that “just” 49.5% of total assets are the kinds that you can count or drop on your foot or bump into.

Total liabilities less equity equals $11.677B, of which $4.56B is in long-term debt. Total assets do outweigh total liabilities even if one omits intangibles, but not nearly so impressively. The entire long-term debt balance could be paid out of the cash position, but not if one includes $467M in operating lease liabilities. Don’t get me wrong, Block can play their bills and meet their obligations. This balance sheet does pass the Sarge test. It’s just not nearly as pretty as it looks at first glance.

Wall Street

Wall Street appears to like Block. I can find seven sell side analysts that are both rated at five stars by TipRanks and have opined on SQ since these earnings were released. All seven rate SQ as either a “buy” or buy equivalent. The average target price of these seven analysts is now $154.71, with a high of $175 (Mark Palmer of BTIG), and a low of $135 (Mayank Tandon of Needham). Analyst of note? Lisa Ellis of MoffettNathanson, who I have mentioned to readers in the past as an analyst that I pay attention to. Lisa did maintain her “buy” rating but did reduce her target price from $200 to $170 on this report.

My Thoughts

Maybe I just see things differently than do most of my Wall Street colleagues. This firm lost money in Q1. This firm fell short of expectations even on adjusted earnings and on revenue generation. Everyone watches the Cash App segment which is super reliant on Bitcoin for performance. When that’s good, it’s great. When Bitcoin is not so hot?

Oh, and I am sure you could tell that I don’t love a balance sheet that places a lower value on tangible assets than it does on intangible assets. Would I invest in Block? I don’t think so. Is the stock tradable? Of course it is.

Readers will note that SQ dropped from a high of $289 last August to a low of $82 (-71.6%) the day that Russia invaded Ukraine. The shares rebounded in March, peaking in between the 23.6% ($130) and 38.2% Fibonacci retracement levels. The stock’s daily MACD is ugly, Relative Strength is relatively weak, and the stock’s Full Stochastics Oscillator is just about oversold.

If a trader felt that SQ had probably stopped going lower and was willing to take on some discounted portential equity risk… Those July $85 puts are getting my attention. Make that sale, and the stock goes higher, the trader pockets a rough $9.15. Make that sale and end up having to eat the shares? Net basis of $75.85. Well below the current 2022 lows.