Going into today’s scheduled earnings report, things look to be going from bad to worse for digital payments company Block (NYSE:SQ). The company formerly known as “Square” has seen its share price slump 40% year-to-date. The stock now trades at around $88 a share, having fallen way below the $100 threshold.
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At its current level, SQ stock is almost 70% below its 52-week high of $289.23. The big losses come following a corporate rebrand and repositioning to focus more on cryptocurrencies, with plans to develop an open source Bitcoin (BTC-USD) mining system and to hold more digital assets on its books.
While that pivot sounded good last fall when the price of BTC was at an all-time high above $68,000, the current environment is more challenging with Bitcoin’s price having fallen more than 50% to now trade below $36,000 per coin.
This all begs the question: Where does Block go from here? We could get an idea after today’s market close and management reveals the numbers on its fourth quarter 2021. The Zacks Consensus Estimate is for 19 cents per share. The company has also surprised on the positive side in eight of the last 10 earnings reports.
SQ Stock Drop Looks Tempting
The steep drop in the SQ stock price has not gone unnoticed on Wall Street. JPMorgan Chase (NYSE:JPM) recently gave Block an “overweight” rating and a $200 price target, implying potential gains of 104%. In its analysis, JPMorgan singled out Block’s acquisition of buy now, pay later company Afterpay, noting that the purchase will boost Block’s gross profit margin to 26% a year through 2024.
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While some analysts have criticized the Afterpay deal, saying the $29 billion price tag is too expensive, JPMorgan highlighted that Block gets more than 16 million customers and 100,000 merchants added to its platform as a result of the deal, as well as further diversification of its products and services. All of which are long-term positives for Block.
Bank of America (NYSE:BAC) also remains bullish on Block, recently upgrading the stock to “buy” from “neutral” and criticizing investors for focusing too much on the company’s foray into cryptocurrencies and ignoring the market dominance of its Cash App mobile wallet that remains popular with merchants and consumers.
In a note to clients, Bank of America called SQ stock “quite undervalued,” stressing that the market only assigns about $6.5 billion of value to Block’s Cash App business. That translates to roughly $93 per user, compared with $326 for rival PayPal (NASDAQ:PYPL). Block’s Cash App did generate $512 million in gross profits, a 33% year-over-year increase, in the previous third quarter. Bank of America has a price target of $185 on Block stock, implying 89% upside over the next year.
“The market is not currently ascribing nearly enough value to the Cash App business, and once management provides some clarity on forward-looking Cash App expectations, which could happen as soon as the 4Q21 earnings call on February 24, we believe the Street would recalibrate its view on SQ’s valuation, ultimately driving outperformance in shares from current levels,” wrote Bank of America.
Weighed Down by Crypto
While it is encouraging that Wall Street sees reasons for optimism with Block’s shares, there remains an elephant in the room with the company. And the elephant’s name is “cryptocurrencies.”
Block chief executive Jack Dorsey is a raging crypto bull and severed all ties with his other tech venture, Twitter (NYSE:TWTR) last fall so that he can focus his energies exclusively on Block, whose rebrand is meant to emphasize the company’s renewed push into crypto and its underlying blockchain technology. In addition to developing its own Bitcoin mining system, the company held more than 8,000 Bitcoins, which Dorsey has called “the currency of the internet.”
With cryptocurrencies remaining volatile, and most falling sharply this year amid a broad market downturn, going all in on digital coins and tokens has some investors concerned. However, it should be noted that Block’s push into cryptocurrencies hasn’t decimated its balance sheet.
The company still has more than $5 billion of cash on hand and its Cash App does continue to expand and grow. Additionally, there are long reported rumors that Block will eventually apply to become an full-fledged bank. Whether that actually happens is a guess at this point, but investors should keep in mind that there is more to Block than Bitcoin mining.
Wait for SQ Stock Turnaround
A lot could happen with SQ stock following its Q4 print today . The results are almost certain to cause the Block share price to vault higher or collapse lower. And while it is comforting to see that top analysts on Wall Street consider Block’s stock to be a buy, investors should wait for signs of a real recovery before taking a position.
At this point, there are no indications that the share price has bottomed. And the worst maybe yet to come. People should proceed with caution. At a minimum, stay on the sidelines until the Q4 earnings are made public. Right now, SQ stock is not a buy.
On the date of publication, Joel Baglole held a long position in SQ. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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