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Is Square Stock A Buy As Analysts Eye Merchant Business Shake-Up?

https://www.investors.com/news/technology/sq-stock-buy-now/?src=A00220

REINHARDT KRAUSE12:30 PM ET 09/25/2023
Many technology stocks have outperformed in 2023 amid buzz over artificial intelligence technology. But investors have left Square parent Block (SQ) and SQ stock out of the party.

For digital payment processor Block, the growth trajectory of Square's consumer Cash App is one issue. There's also cryptocurrency Bitcoin and the Afterpay acquisition. Also, Square faces growing competition on many fronts.

Meanwhile, Square stock has retreated 28% so far in 2023. The Nasdaq composite has surged 27%, though it pulled back recently. Some technical ratings for SQ stock have weakened.

In its core businesses, Square stock aims to build a two-sided digital payments ecosystem, with products designed for both merchant sellers and consumer buyers.

Block faces slowing growth for its consumer Cash App in 2024, UBS analyst Rayna Kuma said in a recent note to clients.

Also, some investors fear potential weakness in Square's point-of-sale business amid growing competitive pressures from Toast (TOST) in restaurants and Fiserv's (FISV) Clover unit generally.

Block replaced the head of its merchant Square business, Alyssa Henry, with Block founder Jack Dorsey. SQ stock fell Tuesday on the news. At Wolfe Research, analyst Darrin Peller focused on gross profits in a recent report. Gross margin is how much a company earns from revenue before subtracting operating expenses, taxes and interest.

Peller said the Square business needs to expand faster internationally, a move that could improve profitability.

SQ Stock: Marqeta Deal Renewed

Square and Marqeta (MQ) on Aug. 8 said they have renewed their transaction services agreement for Cash App and Afterpay.

In July, Bloomberg reported that Block is suing Visa (V) and Mastercard (MA) on antitrust grounds, alleging that both credit card networks are overcharging U.S. merchants through high cost interchange and merchant location fees.

Amid rising fears of a U.S. recession, one question is how resistant Square will be to a business downturn. The relatively low income levels of Square's customer base is one factor for investors to consider if the U.S. economy weakens, analysts say.

Square Stock: Cash App Growth

The Square Cash App helps individuals manage money, buy stocks and cryptocurrency, and more. Block aims to bridge the Cash App and merchant ecosystems with consumer financing services from Afterpay, acquired last year.

Short-seller Hindenburg Research in March issued a report claiming Square has inflated Cash App user metrics.

The Square Cash App, a peer-to-peer money-transfer service, competes with PayPal's Venmo, Zelle and others.

Square management has outlined a new long-term investment framework, which will put the company on the road to higher quality earnings under generally accepted accounting principles, often known as GAAP.

One bright spot: Square holds $5 billion on its balance sheet. In addition, Square stock uses a dual class structure of common stock, which gives insiders more voting power.

Block Stock: Tough Times For Crypto

In late 2021, Square changed its name to Block, while retaining the ticker SQ. In part, the move reflected the company's commitment to blockchain technology, which underpins cryptocurrency.

Meanwhile, Bitcoin has rallied during the banking crisis. But Bitcoin is still down significantly from its high near $68,900 in November 2021.

Block has aimed to build infrastructure that enables bitcoin-based commerce on its merchant platform. In addition, Square created a new business line to help developers build financial services products focused on Bitcoin.

SQ Stock: Cash App Growth One Key

Cash App user growth and monetization is key to the outlook for SQ stock. Cash App growth soared during the coronavirus pandemic amid government economic stimulus. The bearish view is that Cash App growth will slow as the U.S. economy normalizes.

The company retains the Square brand for merchants that use its point-of-sale technology and services.

Square on Jan. 31, 2022, closed the acquisition of Australia-based consumer lending startup Afterpay. Its growth has slowed. Further, fintech companies like Afterpay that are "buy now, pay later," or BNPL, face increased regulation.

Announced Aug. 1, 2021, the Afterpay deal was originally valued at $29 billion. With the big drop in Block stock, the deal was valued at less than $15 billion at closing.

In the emerging BNPL market where Afterpay competes, the players there are encroaching on credit card networks. Apple (AAPL) has emerged as a rival to Afterpay. Another rival of Afterpay is Affirm Holdings (AFRM).

Some investors questioned whether Block needed to buy a company in this sector as opposed to building up its own capabilities or partnering. Competition is heating up in the BNPL market.

Another questionable deal: Square acquired a majority stake in Jay-Z's Tidal music streaming service for $297 million in cash and stock.

Block Stock: Competition Heats Up

With multiple products, SQ stock faces stiff competition in both consumer financial apps and the small business market. Rivals include PayPal Holdings (PYPL), First Data's (FDC) Clover unit, Shopify (SHOP), merchant acquirers, and well-funded startup Stripe.

For merchants, Square makes credit-card readers that plug into mobile devices. Its Square Capital division provides loans to sellers.

During the coronavirus pandemic, Cash App emerged as a digital alternative to traditional banks. Consumers used the Cash App's direct-deposit feature to receive government stimulus payments, for example.

The bearish view is that Cash App's momentum proves transitory with low customer retention after the coronavirus pandemic.

With roots in serving such micromerchants as food trucks and farm-stand vendors, Square has moved "upmarket," targeting larger businesses.

In addition to selling credit-card readers, Square provides software for point-of-sale and back offices in order to manage inventory and other tasks.

Square recently focused on software products that can be used across many industries, such as invoicing, payroll and marketing. It also aims to integrate its payment tools into e-commerce platforms.

SQ Stock Fundamental Analysis

Square earnings and revenue for the second quarter topped views but gross payment volume from merchant customers missed. SQ stock sold off on management commentary regarding business trends.

June-quarter earnings rose 116% to 39 cents, topping estimates of 36 cents. Net revenue rose 26% to $5.53 billion versus estimates of $5.1 billion.

Analysts had projected earnings of 36 cents a share on revenue of $5.1 billion. Gross payment volume rose 40% to $54.2 billion, just below estimates of $54.5 billion. Gross profit for Cash App rose 37% to $968 million versus estimates of $935 million.


But overall gross profit growth slowed to 27%, or $1.87 billion, from 32% in the first quarter. Management forecast further third-quarter deceleration to 21% growth.

Cash App active monthly users reached 54 million in the June quarter, up slightly from 53 million in the March quarter.

Earnings before interest, taxes, depreciation and amortization, called EBITDA, jumped 105% to $384 million, handily beating estimates of $297 million.

Block said it expects $1.5 billion in adjusted EBITDA in 2023, including the $87 million beat in the June quarter. Analysts had called for full-year EBITDA of $1.36 billion.

Is Square Stock A Buy Or Sell Right Now?

SQ stock plunged about 61% last year.

Technical ratings have weakened. Square's Relative Strength Rating stands at 13 out of a best-possible 99, according to IBD Stock Checkup. The best stocks tend to have an 80 or better RS Rating.

The relative strength line, the blue line in the chart above, compares a stock's price performance with that of the S&P 500. A downward-trending RS line tells you the stock is underperforming the general market.

Block stock holds an IBD Composite Rating of 51 out of a best possible 99.

SQ stock, meanwhile, has an Accumulation/Distribution Rating of E. The rating runs from a best-possible A+ to a worst-possible E. The rating analyzes price and volume changes in a stock over the past 13 weeks of trading.

As of Sept. 25, SQ stock holds a cup base entry point of 89.97. Block stock trades well below the entry point.