Has the block turned a corner?

fintech company block it (NYSE:SQ) posted a lot of impressive numbers in its fourth quarter earnings report, but one number in particular stood out. The company generated $178 million in net income for the quarter, which may not seem all that impressive for a multibillion-dollar company that owns Square, Cash App, and other assets, but it’s important.

This is because it was the first quarter after the third quarter of 2021 that Block actually made a net profit. In fact, the company barely made any money in the quarter, with net income of less than $1 million. Therefore, the most recent quarter marks the first time that blockchain has achieved significant gains since 2018. second Quarter 2021.

The fourth quarter was a solid quarter for Block, with revenue and profits growing across the board. These results and a better-than-expected outlook for 2024 sent Block shares soaring more than 17% Friday morning to about $80 a share.

Return to profitability

The last time Block reported a profitable quarter, the stock had risen to an all-time high of $289 per share at the height of the 2021 tech bubble. But when the bubble burst, the stock price plummeted, and Block was hit as hard as almost any other company, with its price falling to a low of $38 per share in October 2023. This represents an 86% decline from the 2021 high.

Last fall, around the time it became somewhat clear that the Federal Reserve could end raising interest rates (although it was far from certain), block stocks began to bounce back from their lows. It finished 2023 strong, soaring to $77 per share in a fourth-quarter rally, putting it in the black for the year. This is a 23% increase.

The stock had a big first-quarter gain leading up to Thursday’s earnings report, and has since received significant price target increases from nearly every Wall Street analyst. The consensus price target for the block in 2024 is around $88 per share.

As mentioned above, Block was profitable in the fourth quarter with net income of $178 million, or 29 cents per share. This is an increase from a net loss of $29 million in the third quarter and a net loss of $115 million in the fourth quarter of 2022. , Block reported net income of $10 million, or 2 cents per share, returning to full-year profitability after posting a net loss of $541 million in 2022.

In early 2023, Block CEO Jack Dorsey talked about driving “profitable growth at scale” during his Q4 2022 earnings call.

“Over the past few years we have grown our business and cost base significantly. We are focused on operating efficiently in 2023 and expect to meaningfully slow our cost growth compared to the previous year,” Dorsey said.

At the time, Dorsey was targeting $1.3 billion in adjusted EBITDA for 2023, well above $1.8 billion in adjusted EBITDA. Additionally, Block’s adjusted operating profit was $351 million for the full year, better than the projected loss of $150 million.

Improved cost management

Fast-forward to the present and in the fourth quarter of 2023, Block was boosted by strong growth in its two largest revenue centers, Square and Cash App. Square generated gross profit of $828 million, up 18% year-over-year, while Cash App generated $1.2 billion, up 25% year-over-year. But sales growth has never been much of an issue for Block.

What has changed is the focus on cost management. The company’s operating expenses rose about 14% to $5.8 billion on a non-GAAP basis, after growing about 50% annually over the past three years.

“We have implemented a number of initiatives aimed at increasing operating efficiencies across our business in 2023, which have somewhat benefited our 2023 results and are more significant for cost savings in 2024 and beyond,” Dorsey said in his fourth quarter 2023 shareholder letter. “I expect to contribute greatly,” he wrote. .

Some of them capped the number of employees at 12,000, leading to layoffs. Dorsey said the cap would remain in place “until business growth meaningfully outpaces company growth.”

Around the corner?

Block appears to be moving back in the right direction based on these results and its outlook for 2024. For the first quarter, the company is targeting gross profit of $2 billion to $2.02 billion, roughly the same as the fourth quarter. Adjusted EBITDA is expected to be between $570 and $590 million, up from $562 million in the last quarter, and adjusted operating income is expected to be between $225 and $245 million, up from $185 million in the last quarter. is expected to increase.

Block expects full-year 2024 revenue to be at least $8.65 billion, up about 15% from the previous year. Adjusted EBITDA is estimated at $2.63 billion in 2023, up from $1.79 billion. This is higher than the consensus forecast of $512 million. Additionally, adjusted operating income is expected to increase from $351 million in 2023 to at least $1.15 billion.

Block also appears reasonably priced, with a forward price-to-earnings (P/E) ratio of 23 and a five-year P/E-to-growth (PEG) ratio of 0.86, which is less than 1. Investors in Block took a big hit during the crash and may still be afraid to go back, but the outlook and expectations that interest rates are starting to fall may have them turning the corner. However, investors were urged to exercise caution and pursue continued profitability.