Block
The accelerated growth during the pandemic seems to have pulled a lot of demand forward which now means a period of structurally lower growth. This is one factor in the stock's 51% YTD decline with the other being rising rates which has led to weakness in nearly every high-multiple stock.
As long as Square's revenue growth is slowing, growth investors are unlikely to be interested. Nor is the valuation low enough to entice value investors. Therefore, investors should closely pay attention to its earnings to see signs of a change in trend.
Inside the Numbers
In Q1, Block reported $0.18 in adjusted earnings per share which fell short of analysts' expectations of $0.19 per share. Revenue also missed at $4 billion vs expectations of $4.2 billion. This was a 22% decline from last year due to lower cryptocurrency revenue. Without taking this into account, revenue would have been 44% higher.
Finally, gross payment volume also came in lighter than expected at $43.5 billion vs $44.6 billion. This is a measure of all the transactions that are taking place on Block's platforms and transaction fees from this are a major part of Block's overall revenue.
The company chose not to issue any guidance for the coming quarter due to uncertainties around cryptocurrency revenue. However, it's clear that the company is benefitting from an increase in the use of payment processors at stores with the economy fully reopen. But this same factor is depressing the growth and use of the Cash app.
When Block was trading at its highs, the bull thesis behind the stock was the increasing adoption of digital wallets, and Square's position as one of the leading companies. This thesis is still valid but investors' expectations are changing in terms of valuing cash flow over growth. It's unclear how the company will deliver this cash flow and whether it will be quick enough to satisfy investors.
