The trajectory of Block (NYSE:SQ) stock looks like this: $80 in 2020, then $289 in 2021, and back to $80 in 2024. It’s been quite a roller-coaster ride for loyal shareholders. Block must now prove its value to investors. Block stock is facing a challenging risk-to-reward balance.
You may have some major concerns after delving into Block’s valuation, along with the company’s lackluster earnings performance. Then, you’ll probably conclude that it’s not the best time to put your investable capital on the chopping block with Block.
Can Block Continue to Cash In on Cash App?
Not long ago, Morgan Stanley analysts downgraded Block stock from “equal weight” to “underweight.” They also reduced their price target on Block shares from $62 to $60.
Reportedly, the Morgan Stanley analysts cited concerns about Cash App’s ability to grow with Generation Z (a.k.a. “Zoomer”) consumers. It’s possible that Block’s competitors have already captured the majority of young consumers’ attention.
That’s a valid concern. Block relies heavily on Cash App, and on young consumers. In the coming quarters, Block will have to demonstrate growth in its Cash App revenue. Otherwise, the bullish argument for Block stock could just fall apart.
All in all, Block’s upcoming quarterly reports could be make-or-break for the company. In 2023’s fourth quarter, Block earned 45 cents per share, missing Wall Street’s call for 59 cents per share.
For the current quarter, the analysts’ consensus estimate calls for Block to earn 72 cents per share. Will Cash App save the day, and will Block exceed Wall Street’s high expectations? That’s hard to predict, and prudent investors shouldn’t make any assumptions.
Block’s Surprisingly High Valuation
Recently, I checked Block’s GAAP-measured trailing 12-month price-to-earnings (P/E) ratio and found that it was in the quadruple digits. I couldn’t believe what I was seeing, so I delved deeper.
Next, I observed that Block’s non-GAAP trailing 12-month P/E ratio was around 45x. I double-checked this by dividing the Block share price by the sum of the company’s previous four quarterly EPS results. I arrived at $80 divided by $1.79, which is 44.7x, and that’s pretty close to 45x.
Now, let’s make some comparisons. The sector median GAAP P/E ratio is 10.88x, versus quadruple digits for Block. Meanwhile, the sector median non-GAAP P/E ratio is 9.77x, versus approximately 45x for Block.
One might assume that, after Block stock’s return to $80, Block wouldn’t be too richly valued. More air can be let out of Block’s balloon for a better value.
Block Stock: Don’t Be Surprised if It Falls to $60
I hate to be the bearer of bad news. However, the Morgan Stanley might be spot-on with their $60 price target for SQ stock.
It’s unclear whether Block can continue to grow Cash App’s market presence among young consumers. Moreover, Block missed Wall Street’s quarterly EPS forecast and appears to be overvalued right now. Therefore, Block stock is likely to stay stuck at lower price points, and investors shouldn’t consider buying it now.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.