• Wed. Sep 28th, 2022

Bulk profits promise plenty of moving parts, but Square’s parent company may have a secret weapon

ByRandall B. Phelps

May 4, 2022

Square recently changed its name to Block Inc. in an effort to better encompass the diversity of its business, and the company’s earnings report on Thursday will highlight how many stories have been rolled into one.

SQ Block,
-10.53%
was a tale of two companies at the start of the pandemic, as its seller segment saw its growth constrained by restrictions on in-person activities, while its Cash App segment benefited from an influx of stimulus funds and growing interest in business activities. On the face of it, that meant Block’s vending business was set up for a rebound in in-person spending this year, while its Cash App business would face tough comparisons with a period helped by disbursements. stimulus.

Don’t Miss: Square Changes Name to Block as Company Grows

The latest macroeconomic developments, however, add another wrinkle to the spending narrative.

“On the one hand, SQ seems to be in the crosshairs of cyclical sensitivity, given its SMB [small- and medium-size business] shift within the seller-merchant base and outsized exposure to “low-end consumers,” which many predict will be the first cohort to rein in discretionary spending during a downturn,” wrote SMBC analyst Andrew Bauch. Nikko Securities America, in a note.

Bauch also noted that feedback from airlines and online travel agencies suggests strong demand heading into summer, positioning Block to benefit as consumers prepare to spend money “out of at home” in areas such as retail and restaurants.

Add to that that Block’s business has changed over the past few years as the company has added new layers through acquisitions. Block now has exposure to the buy it now and pay later, or BNPL, industry through its acquisition of Afterpay, which closed earlier this year.

Read: Square revamps booth hardware with dip-and-tap integrated payments

Afterpay brings some complexities, including uncertainty about the trajectory of the BNPL industry. Bank of America analyst Jason Kupferberg recently highlighted third-party data indicating a “deceleration in growth” in BNPL app downloads more generally, compared to tough comparisons from the previous year. He wrote that he was optimistic about the industry, although he acknowledged that he was also “aware of the potential risks of inflation and higher interest rates”.

Jefferies analyst Trevor Williams saw “noise” ahead of the report, pointing to “inconsistent treatment of Afterpay in Street models.” Not all analysts included it in their models, he wrote, and there was a “wide range of those who did.”

Block’s Cash App is also home to Credit Karma’s former tax preparation business, and Bauch sees the company’s ability to monetize this area as “the biggest variable” for Block in the coming quarters. The tax preparation business allows Block to capitalize on a potential increase in tax refunds coming into the Cash app, which consumers would then have the ability to spend or invest.

See also: Former CEO of Square, Jack Dorsey is now officially “Block Head”

Assuming the Cash app processes 1.5 million tax returns generating a refund of $2,000 on average, Block would see $3 billion in funds flowing into the app. If the company were to monetize this amount at the same rate as in the past, Bauch calculates that the initiative could generate around $600 million in additional gross profit.

This potential “is largely excluded from the sell-side and buy-side models”, he concluded.

Wolfe Research analyst Darrin Peller added that tax preparation activity “could have a similar effect on the ecosystem as government pandemic stimulus payments.” He saw the potential for Cash App taxes to increase monthly active users and noted that his research suggested “a high proportion of customers send refunds directly into Cash App despite SQ not mandating it.”

Here’s what to expect in the company’s May 5 report.

To monitor

Earnings: Analysts tracked by FactSet expect Block to earn 20 cents per adjusted share in its latest quarter, up from 41 cents per share a year earlier. According to Estimize, which relies on projections from hedge funds, academics and others, the average estimate is 27 cents per share.

Revenue: The FactSet consensus forecast revenue of $4.14 billion, up from $5.06 billion a year ago. On Estimize, the average projection is $4.15 billion in revenue.

Analysts tend to prefer looking at Block’s gross profit rather than revenue, as revenue is skewed by factors such as Cash App’s bitcoin BTCUSD,
+0.32%
– trading function, which generates considerable income with minimal profit. The FactSet consensus is $1.3 billion in gross profit, down from $964 million a year ago.

Movement of stock: Block shares have gained after three of the company’s last five earnings reports. They climbed 26% after the last report.

Yet the stock has more than halved in the past 12 months, as the S&P 500 SPX,
-3.56%
increased by 1.7%.