Is Square Stock A Buy Ahead of Q4 Earnings, 2024 Guidance?

Many technology stocks outperformed in 2023 amid buzz over artificial intelligence technology. With a big rally following its third quarter earnings report,  Square parent Block (SQ) and SQ stock finally joined the party. But Square stock started off 2024 poorly.

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For digital payment processor Block, the growth trajectory of Square’s consumer Cash App is one issue. There’s also cryptocurrency Bitcoin and the Afterpay acquisition. Also, Square faces growing competition on many fronts.

Fourth quarter earnings for SQ stock are due in February.

Further, Block in 2023 replaced the head of its merchant Square business, Alyssa Henry, with Block and Twitter founder Jack Dorsey.

At Morgan Stanley, analyst James Faucette in a report said Block’s primary objective should be to drive consistent growth and free cash flow generation in the merchant Square business. If that happens, he added that will “in turn support the expansion of banking product development and adoption in Cash App to eventually become a key financial services provider for the Gen Z/Y population.”

Block reported Q3 earnings and revenue that topped estimates. SQ stock jumped on preliminary 2024 guidance for earnings before interest, taxes, depreciation and amortization, a key metric known as EBITDA.

Meanwhile, Square stock gained 23% in 2023. The Nasdaq composite surged 43%. Also, SQ stock clawed back from a 52-week low of 38.85 set on Oct. 27.

But as of Jan. 22, SQ stock is down 14% in 2024.

SQ Stock: Cash App Growth

In its core businesses, Square stock aims to build a two-sided digital payments ecosystem, with products designed for both merchant sellers and consumer buyers.

The Square Cash App helps individuals manage money, buy stocks and cryptocurrency, and more. Block aims to bridge the Cash App and merchant ecosystems with consumer financing services from Afterpay.

The Square Cash App, a peer-to-peer money-transfer service, competes with PayPal’s Venmo, Zelle and others.

Square management has outlined a new long-term investment framework, which will put the company on the road to higher quality earnings under generally accepted accounting principles, often known as GAAP.

One bright spot: Square holds $5 billion on its balance sheet. In addition,  Square stock uses a dual class structure of common stock, which gives insiders more voting power.

In late 2021, Square changed its name to Block, while retaining the ticker SQ. Meanwhile, the move reflected the company’s commitment to blockchain technology, which underpins cryptocurrency.

Block Stock: Bitcoin Products

Block has aimed to build infrastructure that enables bitcoin-based commerce on its merchant platform. In addition, Square created a new business line to help developers build financial services products focused on Bitcoin.

In January, Square said its Bitcoin digital wallet was available for Cash App users in 95 countries.

“The product and platform aims to democratize and simplify access to self custody solutions for crypto assets, allowing users to own and manage their Bitcoin easily and securely, without relying on online custodians and hot wallets than can be compromised by bad actors,” said Macquarie analyst Paul Golding in a report.

He added: “We think, if marketed broadly, the Bitkey platform could drive greater use of Cash App generally, but especially for crypto users.”

Cash App user growth and monetization is key to the outlook for SQ stock.  The company retains the Square brand for merchants that use its point-of-sale technology and services.

Also, some investors fear potential weakness in Square’s point-of-sale business amid growing competitive pressures from Toast (TOST) in restaurants and Fiserv‘s (FISV) Clover unit generally.

SQ Stock: Afterpay Acquisition

Square and Marqeta (MQ) on Aug. 8 said they have renewed their transaction services agreement for Cash App and Afterpay.

In July, Bloomberg reported that Block is suing Visa (V) and Mastercard (MA) on antitrust grounds, alleging that both credit card networks are overcharging U.S. merchants through high cost interchange and merchant location fees.

In the event a U.S. recession eventually hits, one question is how resistant Square will be to a business downturn. The relatively low income levels of Square’s customer base is one factor for investors to consider if the U.S. economy weakens, analysts say.

In a move to boost its Cash App business, Square in early 2022 closed the acquisition of Australia-based consumer lending startup Afterpay. “Buy now, pay later” (BNPL) companies such as Afterpay compete with credit card networks.

In another deal, Square acquired a majority stake in Jay-Z’s Tidal music streaming service for $297 million in cash and stock.

Block Stock: Competition Heats Up

With multiple products, SQ stock faces stiff competition in both consumer financial apps and the small business market. Rivals include PayPal Holdings (PYPL), First Data‘s (FDC) Clover unit, Shopify (SHOP), merchant acquirers, and well-funded startup Stripe.

For merchants, Square makes credit-card readers that plug into mobile devices. Its Square Capital division provides loans to sellers.

With roots in serving such micromerchants as food trucks and farm-stand vendors, Square has moved “upmarket,” targeting larger businesses.

In addition to selling credit-card readers, Square provides software for point-of-sale and back offices in order to manage inventory and other tasks.

Square recently focused on software products that can be used across many industries, such as invoicing, payroll and marketing. It also aims to integrate its payment tools into e-commerce platforms.

SQ Stock Fundamental Analysis

Square earnings for the period ended Sept. 30 were 55 cents per share on an adjusted basis, up 31% from the year-earlier period. Analysts had projected earnings of 47 cents a share.

Also, Square said net revenue rose 24% to $5.62 billion, including Cash App transactions for digital cryptocurrency Bitcoin. SQ stock analysts had predicted revenue of $5.42 billion.

Financial analysts also view gross profit as a key metric for SQ stock. Gross profit rose 21% to $1.9 billion, edging by estimates of $1.895 billion.

Cost-cutting boosted earnings before interest, taxes, depreciation and amortization, a key metric known as EBITDA. It jumped 46% to $477 million, handily beating estimates of $378 million.

For fiscal 2024, Square said it expects EBITDA of $2.4 billion, up about 44% from this year’s estimated $1.67 billion. Analysts had projected 2024 EBITDA of $1.94 billion.

In Q3, gross payment volume from the transactions of merchant customers rose 11% to $55.7 billion, missing estimates of $61.14 billion.

Is Square Stock A Buy Or Sell Right Now?

SQ stock plunged about 61% in 2022.

Square’s Relative Strength Rating stands at 78 out of a best-possible 99, according to IBD Stock Checkup. The best stocks tend to have an 80 or better RS Rating.

The relative strength line, the blue line in the chart above, compares a stock’s price performance with that of the S&P 500. A downward-trending RS line tells you the stock is underperforming the general market.

Block stock holds an IBD Composite Rating of 80 out of a best possible 99.

SQ stock, meanwhile, holds an Accumulation/Distribution Rating of B-minus. The rating runs from a best-possible A+ to a worst-possible E. The rating analyzes price and volume changes in a…