Block stock recovers from after-hours dip as investors see some upside

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Block (NYSE:SQ) stock was up 1.0% in Friday late morning after investors sifted through the pros and cons of the company’s Q2 results and its earnings call late Thursday. Initially, its stock dropped in Thursday after-hours trading as its trends in July pointed to slower growth in its Square ecosystem.

Q2 adjusted EBITDA of $187M came in better than the $138M Street consensus, but its reduced guidance on investments “likely shook some investors while others likely appreciate Block’s (SQ) ability to drive better adjusted EBITDA,” said Oppenheimer analyst Dominick Gabriele in a note.

Block (SQ) reduced its 2022 planned investments by $250M. “We pulled back on experimental and less efficient go-to-market spend, adjusted risk loss estimates based on more current trends, and slowed the pace of hiring,” said Block CFO Amrita Ahuja during the Q2 earnings call.

For 2022, the company expects to increase its overall non-GAAP operating expenses by $1.85B vs. 2021, about 10% less than its previous guidance.

“Our actions today show that we are also focused on demonstrating greater near-term profitability as we head into what could be a more volatile macro environment,” Ahuja said.

On the negative side, Q2 gross profit of $1.47B trailed the $1.49B consensus. And incremental investments are seen as a way to boost gross profit acceleration, the pullback in investments could have investors nervous, said Oppenheimer’s Gabriele, who has an Outperform rating on the stock.

“We believe Block (SQ) can protect and improve EBITDA dollars, and new guidance suggests a ~15% increase vs. our previous expectations in 2022FY adjusted EBITDA even with a ~2% gross profit reduction, he said.

While the company moderates its CY2023 investment, Truist analyst Andrew Jeffrey expects “it will spend more as gross profit dollar growth accelerates.”

Jeffrey, with a Buy rating on the stock, “believes Square and Cash App’s gross profit growth deceleration is transitory.” He adds: “We believe the seamless integration of the Square and Cash App ecosystems, catalyzed by BNPL (Buy Now Pay Later), will position Block (SQ) for accelerating C23/C24 and beyond gross profit dollar growth.”

Fears that its Afterpay acquisition would weigh on Q2 results as some rival BNPL business valuations declined on concerns of deteriorating credit proved unfounded, said BTIG analyst Mark Palmer, who has a Buy rating on Block (SQ). “Afterpay during the quarter generated $208M of revenue and $150M of gross profit, while its bad debt as a percentage of sales declined sequentially,” he said in a note to clients.

SA contributor Khaveen Investments sees Block (SQ) as undervalued even without bitcoin (BTC-USD)