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Earnings Outlook: Block may be in trouble as economy sours, but Cash App could save it for now

On paper, Block Inc.’s varied businesses all are potentially sensitive to a weakening economic environment, and revenue and earnings are supposed to decline from last year. In reality, the story could be more nuanced—at least for now.

Block
SQ,
+10.43%

is the (relatively) new corporate name for Square, and it houses a variety of businesses including a seller-services segment that has the Square moniker. Block is also home to the fan-favorite Cash App service and newly acquired buy-now-pay-later operator Afterpay.

Square, the merchant segment, could be vulnerable to a pullback in discretionary spending, though some Square sellers could fare better than others. Fellow payments companies have indicated that restaurant volumes are growing nicely as people travel and generally clamor to do more outside their homes.

The company’s Cash App business could also feel impacts from a rockier spending landscape, but the Cash App is linked to a debit card, and people traditionally use debit more for essential items that they’re less likely to do without. Susquehanna analyst James Friedman notes that the company’s Cash Card product “is exposed to high inflation spend categories such as gas and restaurants.”

Then there’s the bitcoin-trading aspect of the Cash App business. While tanking prices for digital assets likely dampened trading interest, bitcoin
BTCUSD,
+1.93%

is only a small contributor to Block’s gross profit.

See also: Robinhood to lay off 23% of its workforce, with CEO admitting ‘this is on me’

Finally, there’s Block’s newly acquired Afterpay buy-now-pay-later business. Investors have been generally wary about how the BNPL industry will shake out if consumers start feeling more financial pressure, and there have been mixed data points in recent weeks about the state of consumer credit health, though mainly in regards to traditional credit.

See also: Americans’ credit-card debt just had the biggest jump in more than 20 years, New York Fed says

Expect the company’s Cash App to be the star of the show when Block reports results Thursday afternoon, as the business sits at perhaps the heart of the controversy around Block’s stock.

“Investors are encouraged by healthy Cash App trends / ‘Teen Cash App,’ though worried how a cyclical downturn may impact both Cash App and Seller,” Citi Research analyst Peter Christiansen wrote.

Deutsche Bank’s Bryan Keane wrote that he thought the Cash App could deliver a positive surprise in the quarter. In his view, the business’s “velocity of spend will remain resilient in an economic slowdown.”

What to expect

Revenue: Analysts tracked by FactSet expect Block to report $4.33 billion in revenue, down from $4.68 billion a year before.

Analysts, however, generally look at Block’s gross profit as a proxy for revenue since the company’s revenue figure is distorted by features like bitcoin trading, which bring in heavy revenue at a minimal margin. The FactSet consensus calls for $1.48 billion in gross profit, up from $1.14 billion a year before.

Earnings: The FactSet consensus calls for 16 cents in second-quarter adjusted earnings per share, down from 66 cents a year before. According to Estimize, which crowdsources projections from hedge funds, academics, and others, the average estimate calls for 18 cents in adjusted earnings per share.

Stock movement: Shares of Block have risen after seven of the company’s last 10 earnings reports. Block’s stock has dropped 71% over the past 12 months, as the S&P 500
SPX,
+1.57%

has declined 7%.

Of the 47 analysts tracked by FactSet who cover Block’s stock, 34 have buy ratings, 11 have hold ratings, and two have sell ratings.

What else to watch for

RBC Capital Markets analyst Daniel Perlin is curious to see whether the coming earnings report brings a “reset” that could make Block shares seem more appealing.

With the stock having fallen by more than half so far this year, he wrote that “it’s hard not to want to be more constructive” on the name. Still, “the probability of a modest reset to numbers is likely warranted in the current context given concerns over possible recession, which would impact SQ’s end markets and consumers,” Perlin continued. “Assuming Q2/22 offers this reset, we believe investors could begin to re-engage in the stock.”

Perlin will also be watching for signs of consumer spending pressures. “[W]e believe the financial health of subprime and affluent consumers is highly bifurcated, which could negatively affect Cash App’s payment volume in this and in coming quarters, as we believe Cash App users skew towards less affluent demographics, who are most impacted by high inflation as it relates to non-discretionary spending,” he wrote.

Read about a Square rival: Clover finds winning formula as it takes on the ‘Apple’ of payment devices

Barclays analyst Ramsey El-Assal is intrigued by numerous big-picture opportunities ahead of Block, including international expansion for the Cash App and integrations between Afterpay and Block’s core businesses.

These initiatives could have bigger impacts later this year and into next year, but El-Assal said that it’s “unlikely SQ provides more detailed guidance on the upcoming Q2 call, following recent precedent set by the company.”

Susquehanna’s Friedman is also interested in Block’s Afterpay strategy.

“It sounds to us like the company is prioritizing loss mitigation over aggressive growth in the coming quarters,” he wrote. “According to SQ, management believes that many BNPL relationships with merchants will become nonexclusive in coming years. Instead of fighting for these relationships now, SQ is playing the ‘long game’ with Afterpay.”

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