Has Block Turned the Corner?

Published on

Fintech company Block (NYSE:SQ) had a lot of impressive numbers in its fourth-quarter earnings report, but one in particular stood out. The firm generated $178 million in net income in the quarter, and while it might not sound that impressive for a multi-billion-dollar firm that owns Square, Cash App and other properties, it is significant.  

That’s because it was the first quarter since the third quarter of 2021 that Block actually turned a net profit. In fact, the company barely turned a profit at all in that quarter, generating less than $1 million in net income. Thus, the most recent quarter marked the first significant profit for Block since the second quarter of 2021.

Q4 was a strong quarter overall for Block, with gains in revenue and profit. Those results and a better-than-anticipated outlook for 2024 sent Block stock soaring more than 17% Friday morning to around $80 per share.

Return to profitability

The last time Block reported a profitable quarter, its stock price rose to an all-time high of $289 per share — at the height of the 2021 tech bubble. However, the shares came crashing down when that bubble burst, and Block was hit as hard as almost any other firm, as its price dipped to a low of $38 per share in October 2023. That’s an 86% drop from its 2021 highs.

Last fall, right around the time that it became somewhat clear that the Federal Reserve may be done with rate hikes (although we can’t know for sure) Block stock started to bounce off its lows. It finished 2023 strong, surging to $77 per share in a fourth-quarter rally that put it in the black for the year — up 23%.

The stock was sputtering along in the first quarter until Thursday’s earnings report, after which it received a slew of price-target increases from just about every Wall Street analyst. The consensus price target for Block in 2024 is around $88 per share.

As stated above, Block was profitable in the fourth quarter with $178 million in net income, or 29 cents per share, up from a $29 million net loss in Q3 and a $115 million net loss in the fourth quarter of 2022. For the full year, Block had $10 million in net income, or 2 cents per share, marking a return to annual profitability after a $541 million net loss in 2022.

At the start of 2023, Block CEO Jack Dorsey talked about driving “profitable growth at scale” in the Q4 2022 earnings call.

“Over the past several years, we’ve significantly grown our business and our expense base. We’re focused on operating with efficiency in 2023 and expect to slow our pace of expense growth meaningfully compared to prior years,” Dorsey said on the call.

Back then, Dorsey was targeting $1.3 billion in adjusted EBITDA for 2023, and the company ended up well beyond that at $1.8 billion in adjusted EBITDA. Further, Block’s adjusted operating income was $351 million for the full year, better than the projected $150 million loss.

Improved expense management

Returning to the present, in the fourth quarter of 2023, Block was buoyed by strong growth in Square and Cash App, its two biggest profit centers. Square generated $828 million in gross profit, up 18% year over year, while Cash App generated $1.2 billion, up 25% year over year. However, revenue growth has never been a huge problem for Block.

What changed was the focus on expense management, as the company’s operating expenses were up by about 14% last year to $5.8 billion on a non-GAAP basis, after rising around 50% in each of the prior three years.

“We implemented a number of initiatives during 2023 targeted at driving operating efficiency across our business, which had a modest benefit to 2023 results, and we expect to contribute more meaningfully to savings in 2024 and beyond,” Dorsey wrote in the Q4 2023 shareholder letter.

Part of that was a 12,000 cap on the number of employees, which led to layoffs. Dorsey said the cap will stay in place until “the growth of the business has meaningfully outpaced the growth of our company.”

Turning the corner?

Block seems to be headed back in the right direction, based on these results and its 2024 outlook. For the first quarter, it is targeting $2 billion to $2.02 billion in gross profit, about equal to Q4. Adjusted EBITDA is expected to be between $570 million and $590 million, up from $562 million last quarter, while adjusted operating income is anticipated to be $225 million to $245 million, up from $185 million last quarter.   

For all of 2024, Block expects gross profit of at least $8.65 billion, up by about 15% year over year. Adjusted EBITDA is estimated at $2.63 billion, up from $1.79 billion in 2023. This was higher than the consensus projection of $512 million. Additionally, adjusted operating income is expected to hit at least $1.15 billion, up from $351 million in 2023.

Block also looks reasonably priced with a forward price-to-earnings (P/E) ratio of 23 and a five-year P/E-to-growth (PEG) ratio under one at 0.86. Investors in Block took a major hit during the crash and may still be afraid to go back to it, but with its outlook and the expectation that rates will start dropping, it may be turning the corner. Nonetheless, investors are advised to be cautious and look for continued profitability.