To control persistently high inflation and maintain economic stability, the Federal Reserve has raised interest rates to levels not seen in the last 22 years. The financial sector benefits significantly from higher interest rates because they lead to higher profit margins and investment income.

Additionally, the widespread use of mobile technology and the Internet has contributed to the strong demand for online financial services, especially in the wake of the Covid-19 pandemic. The global fintech market is expected to reach $608.35 billion by 2029, expanding at a CAGR of over 14% in the forecast period (2024-2029).

Block, Inc. (sq. m.) has positioned itself comfortably in the fintech sector. With Square, Cash App, TIDAL and TBD, the company creates tools to help people access the economy. Since its launch, Cash App, where you can buy, hold, withdraw or sell bitcoin, has had more than 21 million active users.

However, federal prosecutors are Investigation into financial transactions at SQ, including Cash App and Square. The former employee provided prosecutors in the Southern District of New York with documents alleging that Square and Cash App do not have sufficient customer data for risk assessment and that the company processed multiple cryptocurrency transactions for terrorist groups .

For the first quarter 2024SQ posted net revenue of $5.96 billion, beating analysts’ estimates of $5.82 billion. Revenue from its Cash app reached a record $4.17 billion during the quarter, up 23% year over year. Additionally, the company’s non-GAAP net income per share was $0.85, compared to the consensus estimate of $0.73.

In its earnings release, the company said it would invest 10% of its “gross profit from bitcoin products in bitcoin purchases.”

Additionally, SQ expressed confidence in its growth prospects by raising its guidance for fiscal 2024. The company expects full-year core earnings of at least $2.76 billion, higher than the previous forecast of $2.63 billions of dollars.

SQ shares have gained 2.5% over the past year, closing the latest trading session at $63.29. However, the stock has fallen 4.2% over the past month and 19.1% over the past six months.

Let’s take a look at the factors that could influence SQ’s performance in the coming months.

Solid financial performance

For the first quarter ended March 31, 2024, SQ’s net revenue increased 19.4% year-over-year to $5.96 billion. Bitcoin revenue came in at $2.73 billion, up 26.2% year-over-year. Its gross profit increased 22.2% from the prior-year figure to $2.09 billion. Cash App’s gross profit was $1.26 billion, up 25% year-over-year, and Square’s gross profit was $820 million, up 19% year-over-year.

Furthermore, the company Adjusted EBITDA increased 91.6% from the previous year’s value to $705 million. Its net income attributable to common shareholders grew 380.1% year-over-year to $472.01 million. Additionally, the company’s net income per share was $0.74, an increase of 362.5% from the prior-year quarter.

As of March 31, 2024, Block’s cash and cash equivalents were $5.75 billion, compared to $5.0 billion as of December 31, 2023. However, the company’s current liabilities increased to $12.50 billion as of March 31, 2024, compared to $9.92 billion as of March 31, 2024. December 31, 2023.

Favorable analysts’ expectations

Analysts expect SQ’s revenue for the second quarter (ending June 2024) to grow 13.5% year-over-year to $6.28 billion. The consensus EPS estimate of $0.84 for the current quarter indicates a year-over-year increase of 115.6%. Additionally, the company has surpassed consensus revenue estimates in each of the trailing four quarters, which is impressive.

For the fiscal year ending December 2024, Street expects SQ’s revenue and EPS to grow 14.5% and 89% from a year earlier, to $25.10 billion and 3, respectively. $40. Additionally, the company’s revenue and EPS for fiscal 2025 are expected to increase 11.7% and 27.7% year-over-year to $28.02 billion and $4.35, respectively.

Mixed profitability

SQ’s trailing 12-month asset turnover ratio of 0.68x is 216.4% higher than the industry average of 0.22x. However, its trailing 12-month gross profit margin of 34.77% is 41.7% lower than the industry average of 59.68%. Likewise, the stock’s trailing 12-month EBIT margin of 0.77% is 96.7% lower than the industry average of 23.45%.

Additionally, the stock’s trailing 12-month net profit margin of 1.68% is significantly lower than the industry average of 23.03%. The 12-month ROCE and ROTC of 2.11% and 0.46% are unfavorable compared to industry averages of 10.60% and 6.84%, respectively.

Mixed rating

In terms of forward non-GAAP PEG, SQ is trading at 0.46x, 59.7% lower than the industry average of 1.13x. The stock’s forward EV/sales multiple of 1.53 is 50.4% lower than the industry average of 3.08. However, its forward EV/EBIT of 37.83x is 248.4% higher than the industry average of 10.86x.

Additionally, the stock’s forward Price/Book multiple of 1.93 is 85.8% higher than the industry average of 1.04. Its forward EV/EBITDA of 13.75x is 39.1% higher than the industry average of 9.89x.

POWR Ratings Reflect Uncertainty

SQ’s mixed fundamentals are reflected in its POWR Ratings. The stock has an overall rating of C, which translates to Neutral in our proprietary rating system. POWR Ratings are calculated using 118 different factors, each weighted optimally.

Our proprietary rating system also evaluates each security based on eight distinct categories. SQ has a C grade for quality and value, in sync with its higher-than-industry profitability and lower-than-industry valuation, respectively.

Additionally, SQ has a C grade for stability, justified by its 24-month beta of 2.59.

Inside the Financial services (business) in the industry, SQ is ranked 49th out of 93 stocks.

In addition to the above, we have also assigned SQ grades for Momentum, Growth and Sentiment. Get all SQ ratings Here.

Bottom line

SQ beat analysts’ estimates on the top and bottom lines in its latest reported quarter. The company benefited significantly from a strong labor market and wage growth that allowed Americans to set aside worries about an economic slowdown and continue spending on travel, shopping and dining out.

The company’s top strategic priority is to increase banking product engagement with its existing Cash App transaction business. However, federal prosecutors are looking into financial transactions at the company’s core units, Square and Cash App. Additionally, Block’s banking ecosystem and ambitions could face intense competition from established banks.

Considering SQ’s slowing profitability, high valuation, regulatory issues, and intense competition, waiting for a better entry point into this stock seems wise now.

How does Block, Inc. (SQ) stack up against other companies?

Given its uncertain near-term outlook, the odds of SQ outperforming in the weeks and months ahead are slim. However, there are plenty of industry peers with much more impressive POWR ratings. So, consider these three A (Strong Buy) or B (Buy) stocks from Financial services (business) industry instead:

CPI Card Group Inc. (PMTS)

Manhattan Bridge Capital, Inc. (LOAN)

Consumer Wallet Services, Inc. (CPSS)

To explore more A or B rated fintech stocks, Click here.

What to do next?

Steve Reitmeister, a 43-year investment veteran, just released his 2024 market outlook along with his trading plan and 11 top picks for the year ahead.

Stock Market Outlook 2024 >

SQ shares rose $0.04 (+0.06%) in pre-market trading Thursday. Year-to-date, SQ is down -18.13%, compared to a 15.49% gain in the benchmark S&P 500 index over the same period.

About the Author: Mangeet Kaur Bouns

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to stock analysis, Mangeet seeks to help retail investors understand the underlying factors before making investment decisions. Moreover…

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