Block Stock Down 12% in January – Time to Buy SQ Stock?

The price of Block stock has declined more than 12% so far in the first month of 2022 as a spike in US Treasury yields has effectively shrunk the trading multiples of high-flying growth stocks.

Earlier this morning, the yield of the US Treasury Bond climbed to 1.8% for the first time since the pandemic started even though it is settling lower ahead of the opening bell of the country’s stock market at 1.775%.

Risky equities such as Block, whose cash flow and profit generation capacity is still weak relative to its revenues, such an increase typically leads to a decline in the trading multiples assigned by the market.

In this regard, the forward P/S ratio of Block has declined from a peak of around 11x back in August 2020 to as little as 3.7x as of last Friday’s as the market seems to have adopted a risk-off attitude toward companies at an early stage of their development.

Perhaps interestingly, the price of Block stock has dropped as much as 32% since the company changed its name. Perhaps investors are wondering what this change means for the firm’s long-term vision and strategy and that might be instilling some degree of uncertainty that is not playing in favor of its valuation.

Moreover, the date on which Square changed its name to Block coincides with the day on which Afterpay indicated that it had delayed the discussion of its $29 billion takeover.

What could be expected from SQ stock in 2022 following this sharp decline? In this article, I’ll be assessing the price action and fundamentals of this tech stock to outline plausible scenarios for the future.

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Square Stock – Technical Analysis

Last month when I wrote about Block stock, I highlighted that the technical setup was pointing to a continuation of the downtrend that started once the $190 threshold was broken.

Back then, I stated that a decline toward the low 150s seemed plausible as negative momentum remained strong and there were no signs of a turnaround in the price trend.

Right now, a sharp falling wedge formation has popped up and this pattern could be signaling an upcoming trend reversal in SQ stock if it plays out as expected.

Interestingly, a mild bullish divergence has shown up in the Relative Strength Index (RSI) even though the price has continued to decline. Moreover, the MACD has also bounced recently although it remains neck-deep into negative territory.

Thus far, it seems too early to tell if this could be the beginning of a full-blown trend reversal or if this is just another dead cat bounce.

A bullish outlook would be confirmed if the price decisively breaks that falling wedge formation and if such a move is accompanied by steadily increasing momentum readings.

Considering the extent to which SQ stock has declined recently, the odds are favoring a short-term uptick. That said, the mid-term outlook might be more dependent on the interest rate narrative and the company’s fundamentals.

Square Stock – Fundamental Analysis

In my last article, I highlighted that the multiples at which Block stock traded back in December were attractive for those who wanted to take a long position in the stock.

It is important to remember that Block’s revenues are inflated by its Bitcoin (BTC) dealings, which are not at all accretive to the firm’s gross profits – in fact, their contribution is negligible.

In 2022, the company is expected to report total revenues of $18.7 billion. Of that total, around 60% might be attributed to Bitcoin revenues and that leaves the business with profit-generating revenues of $7.5 billion only.

At its current market capitalization of $65.9 billion, Block is now trading at 9 times its forecasted ex. Bitcoin revenues for this year.

This multiple is significantly lower than that assigned to its competitors. In this regard, Visa and Mastercard are trading above 16x while PayPal (PYPL) is trading at 7.7x.

Block remains a company with promising growth prospects and the dilution caused by the Afterpay deal seems to have been priced into the valuation already. Meanwhile, from a financial standpoint, the company’s balance sheet is robust as long-term debt stands at $4.74 billion while total assets are $13.9 billion including $5.4 billion in cash and equivalents by the end of Q3 2021.

Since the company is cash-flow positive, dilution risks remain low unless the management keeps acquiring companies by issuing more equity.

With this in mind, Square might be trading at an attractive entry price for investors who believe in the company’s prospects, vision, and strategy. That said, the management is yet to confirm its plans regarding a potential pivot toward blockchain technology that could reshape the firm’s performance in the years to come.

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