It’s an understatement to say that Block (NYSE:SQ) stock has gotten clobbered in recent months.
Since July, when shares in the Square and Cash App parent were changing hands at prices nearing $80 per share, SQ stock has declined in price to the tune of nearly 44%.
Finding support right now in the low-$40s per share, it may seem as if the dust is about to settle.
Worst-case scenario, shares hold steady until a recovery begins, right?
Well, even as one sell-side firm (more below) argues that such a scenario could play out, I would expect an even more disappointing outcome for shares moving forward.
Instead of merely staying range bound, another round of price declines may be just around the corner. With this, let’s dive in, and see why now is not the time to even consider entering a position in this stock.
Why SQ Stock has Been on the Chopping Block
Like I discussed in my last article on this payments and digital financial services firm, announcements like a move into the cannabis space are failing to counter a big negative development: the abrupt exit of Alyssa Henry as CEO of the company’s Square segment.
However, Henry’s resignation has not been the only factor weighing on SQ stock in recent months. A good example is the company’s Q2 2023 earnings release in August. Investors reacted negatively to the earnings release, leading to a post-earnings sell-off. Why?
Even though Block beat on revenue and earnings and boosted full-year guidance, it troubled the market with slow growth.
While gross profits grew 27% year-over-year during Q2, during July gross profit growth (on a year-over-year basis) showed a sharp deceleration (to 21%).
Macro-related issues like high interest rates have of course also played a role in this sharp sell-off for shares. Continued high interest rates could be bad news for future growth.
A higher-rate environment also called into question SQ’s once-rich forward multiple, which has since contracted to a far less pricey 25.3 times forward earnings.
Earnings Release Could Drive Another Drop
As hinted above, a recent analyst research note has suggested that SQ stock, after its sharp price decline, has finally found a floor.
On Oct. 4, analysts at Citigroup argued that, due to growing chances that Block’s 2023 EBITDA meets prior expectations, shares are “likely to remain rangebound” until year’s end.
That said, while pessimistic about SQ’s near-term prospects, the analysts (while slashing a prior price target) believe shares could climb back up to $65 per share, once recent issues are in the rearview mirror, and the company gets back on track with execution and product development.
Although it’s possible such a scenario may play out, again I am less confident Square can hold steady at current price.
Despite the big price decline, and in turn, the de-rating of its once-lofty valuation, SQ continues to trade at a massive premium to another large and established fintech/payments company, PayPal (NYSE:PYPL).
Post-market on Nov. 2, Block will release results for the September quarter. If these numbers show that July’s slowdown in gross profit growth was the start of a downward trend, and/or results fall short of guidance/forecasts, expect this stock to once again trend lower as well.
The Verdict
So far, the Citi analysts’ call for rangebound performance has been accurate. Shares today are essentially at the same levels they were changing hands for earlier this month.
However, far from declaring that the “bottoming out” has finally happened, err on the side of caution. Wait for the earnings release.
Sure, it’s possible that Block unveils some positive surprises. Growth could remain resilient despite macro challenges, for example.
Still, with the market in “wait and see” mode with tech/growth stocks, and short interest in this stock extremely low (2.94%), even if earnings wow investors, it’s not like SQ will get squeezed by double-digits early next month.
If the latest results indicate things are not getting worse, take a second look. For now, however, it’s best to stay away from SQ stock.
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.
