Earlier this month, Block (NYSE:SQ) stock plunged, after investors reacted negatively to the CashApp and Square parent’s latest quarterly results.
Yet after sliding further throughout the month, a growing number of analysts and commentators are laying out the new bull case for SQ stock.
After this sharp post-earnings plunge, which sent the stock from the low-$70s to below $60 per share, these bulls argue Block has now become oversold.
However, while some may believe that the worst is over, and that shares have a strong chance of bouncing back from here, I am skeptical. Considering several factors, it’s questionable whether the overall market’s view on SQ will improve from here.
This points to shares (at best) holding steady at present levels, or (at worst) continuing to slide from here. With this, let’s take a closer look, and find out why.
The New Bull Case for SQ Stock
For the quarter ending June 30, 2023, Block reported double-digit gross profit growth across its platforms, as well as positive non-GAAP earnings.
Not only that, the company’s results came in ahead of analyst estimates, and management increased its guidance for full-year adjusted EBITDA and adjusted operating income.
But despite these positives, the market primarily focused on a negative takeaway from the latest earnings report. That would be the company’s reporting that gross profit growth has slowed down in the past month.
As mentioned above, this outweighed the positives in the eyes of investors, hence the stock’s 13.6% decline immediately after earnings, and the subsequent continued drop in price.
That said, more recently, bullishness for SQ stock among the sell-side has been bouncing back. Online commentators like this one have also been arguing that the stock’s post-earnings plunge was an overreaction, and that shares could rebound as adjusted earnings keep increasing, and the company moves closer to GAAP profitability.
Still, while there is substance to this new bull case, it may be too optimistic. Again, there are several factors that may keep Block stuck in its current rut. In turn, leading to more disappointment/frustration ahead for investors.
Why a Recovery May Prove Challenging
Per the bulls, in the coming quarters, if the company meets/beats its aforementioned guidance, shares may recover. Even so, a recovery may prove more challenging than it seems at first glance.
Why? For one, although SQ stock is around 21.2% cheaper now than it was just ahead of earnings, shares in this fintech remain pricey. Block currently trades for 33.5 times forward earnings, while its main rival, PayPal (NASDAQ:PYPL), trades for just 12 times forward earnings.
Yes, one can counter that Block’s higher projected growth rate justifies this premium valuation, but keep in mind the reported slowdown in gross profit growth.
Just because the company beat forecasts last quarter doesn’t mean this will happen this quarter, or in the coming quarters. A continued economic slowdown, or the much-anticipated recession, may result in Block starting to report earnings misses once again.
Long-term, factors like competition may impact SQ’s growth runway. InvestorPlace’s Jeremy Flint recently pointed out one such example: the Federal Reserve’s launch of its own payments platform, FedNow.
Available to both businesses and consumers, FedNow could give both of Block’s main platforms a run for their money.
Bottom Line: The Dust Hasn’t Settled
It may be possible for subsequent results to vindicate the bull case. This, in turn, would enable shares to return to their past valuation levels. A further de-rating for shares, though, may be just as likely, if not more likely.
Given the wide gap between the valuation of Block and its main peer, even a moderately sized de-rating could cause another steep decline in SQ’s stock price.
If Block’s valuation contracted to 25 times earnings, this would mean a more than 25% price decline for shares. A move to 20 times earnings would mean a more than 40% price decline.
SQ stock isn’t necessarily doomed to fall to a bargain-basement price, but the dust clearly hasn’t settled just yet. Wait for more clarity regarding issues like decelerating growth and rising competition. Until then, staying away is your best move here.
SQ stock earns a D rating in Portfolio Grader.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
