One of the biggest losers as of today's evening session is software company Block, whose shares are down -5.3%, underperforming the Nasdaq by -5.0%.
At $53.09, SQ is 36.75% below its average analyst target price of $83.94.
The average analyst rating for the stock is buy. SQ lagged -5.0% behind the S&P 500 index today, and by -40.0% over the last year, returning -29.0%.
Block does not release its trailing 12 month P/E ratio since its earnings per share of $-0.42 are negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for SQ of -126.4. Based on the company's positive earnings guidance of $2.41, the stock has a forward P/E ratio of 22.0. The average trailing Price to Earnings (P/E) ratio of US-based technology companies is 27.16 as of first quarter of 2023. In contrast, the S&P 500 average is 15.97. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead).
The main limitation with P/E ratios is that they don't take into account the growth of earnings. This means that a company with a higher than average P/E ratio may still be undervalued if it has high projected earnings growth. Conversely, a company with a low P/E ratio may not present a good value proposition if its projected earnings are stagnant.
When we divide Block's P/E ratio by its projected 5 year earnings growth rate, we obtain its Price to Earnings Growth (PEG) ratio of 0.65. Since a PEG ratio of 1 or less may indicate that the company's valuation is proportionate to its growth potential, we see here that investors are undervaluing SQ's growth potential .
An analysis of the company's gross profit margins can help us understand its long term profitability and market position. Gross profits are the company's revenue minus the cost of goods only, and unlike earnings, don't take into account taxes and overhead. Here's an overview of Block's gross profit margin trends:
| Date Reported | Revenue ($ k) | Cost of Revenue ($ k) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2023-02-23 | 17,531,587 | -11,539,695 | 34 | 36.0 |
| 2022-02-24 | 17,661,203 | -13,241,380 | 25 | -10.71 |
| 2021-02-23 | 9,497,578 | -6,764,169 | 28 | -30.0 |
| 2020-02-26 | 4,713,500 | -2,823,815 | 40 | 0.0 |
| 2019-02-27 | 3,298,177 | -1,994,477 | 40 | 5.26 |
| 2018-02-27 | 2,214,253 | -1,374,947 | 38 |
- Average gross margin: 34.2%
- Average gross margin growth rate: 0.1%
- Coefficient of variability (lower numbers indicating more stability): 18.7%
We can see from the above that Block business is not strong and its stock is likely not suitable for conservative investors.
Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Block's last four annual reports, we are able to obtain the following rundown of its free cash flow:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023-02-23 | 175,903 | -170,815 | 346,718 | -64.7 |
| 2022-02-24 | 847,830 | -134,320 | 982,150 | 215.28 |
| 2021-02-23 | 173,110 | -138,402 | 311,512 | 285.52 |
| 2020-02-26 | 327,630 | 246,826 | 80,804 | -77.42 |
| 2019-02-27 | 295,080 | -62,787 | 357,867 | 132.67 |
| 2018-02-27 | 127,711 | -26,097 | 153,808 |
- Average free cash flow: $372.14 Million
- Average free cash flow growth rate: 0.0%
- Coefficient of variability (the lower the better): 389683878.9%
Free cash flows represents the amount of money that is available for reinvesting in the business, or paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, SQ is in a position to do either -- which can encourage more investors to place their capital in the company.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). As of the first quarter of 2023, the mean P/B ratio of the technology sector is 6.23, compared to the S&P 500 average of 2.95. The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Block's P/B ratio is 1.82, telling us that the market value of the company exceeds its book value by a factor of 1, but is still below the average P/B ratio of the Technology sector.
As of first quarter of 2023, Block is likely fairly valued because it has a negative P/E ratio, a lower P/B ratio than its sector average, and irregular cash flows with a flat trend. The stock has poor growth indicators because of its weak operating margins with a negative growth trend, and a negative PEG ratio. We hope this analysis will inspire you to do your own research into SQ's fundamental values -- especially their trends over time.
