Block (NYSE:SQ), formerly known as Square, will release its earnings for the fourth quarter on Feb. 24, after the market close. However, don’t expect to be too impressed, as the dramatic drop in SQ stock seems to imply that the market has low expectations.
As of Feb. 20, the stock was down below $100 at $97.72. It has fallen more than 65% since Aug. 5 when SQ stock hit a closing high of $281.81.
This is the market saying that something is wrong, even if it’s only the prior valuation. In other words, the market has been rerating the value metrics for Block, based on potentially slowing earnings going forward.
What to Expect With Block
As one analyst put it at Seeking Alpha, fintech stocks like Block have gone through a general decline because of their high valuations. This is because investors are worried about upcoming Federal Reserve interest rate hikes that should curb general economic growth and lower inflation.
Moreover, PayPal (NASDAQ:PYPL) warned investors on Feb. 1 it expects much slower growth than previously forecast by both analysts and its own guidance.
PayPal cut a target it had set for active users and reduced its 2022 revenue growth goal by two percentage points, according to Barron’s. It also said it would gain “less than half the 48.9 million new accounts added in 2021.” This implies its growth will slow drastically in 2022.
As a result, investors are growing wary of Block. According to Seeking Alpha 13 analysts have now reduced their GAAP earnings per share (EPS) estimates for Q4 to negative 10 cents. Moreover, for 2022, they are projecting a decline in EPS to $1.30 from a forecast of $1.67 for 2021.
This raises the price-earnings (P/E) multiple for SQ stock, all things being the same. However, things are not the same, as the stock has been reacting drastically on the downside.
Nevertheless, as it stands now, at $97.72 per share, SQ stock is still trading at a very high P/E ratio of 75 times for 2022 (i.e., $97.72/$1.30). That is 3x the market average historical P/E of 24.8 times.
Where This Leaves Square Stock
In other words, unless Block’s earnings come in absolutely stellar and it projects higher EPS next year, expect to see SQ stock falter.
The market is likely to lower the average P/E valuation for SQ stock to a more reasonable level like 20 to 30 times earnings. As a result, this could push it down to $39 per share, or 30 times the $1.30 EPS forecast for 2022. That represents a further 60% drop in Block from $97.72 as of Feb. 18.
In other words, expect another major downturn in SQ stock. It could be a bloodbath.
Value investors will likely stay away from this situation. It is not going to be pretty. Moreover, analysts will likely reduce their forecasts for the company, adding to the stock’s troubles and difficult outlook.
What to Do With SQ Stock
Analysts still believe that SQ stock is going to see a major turnaround. For example, Seeking Alpha reports that the average price target of 45 analysts in the last 90 days is $230.83.
However, this is well below the $261 price target in mid-January. Seeking Alpha has a chart showing how quickly analysts have been lowering their price targets. These target prices are likely to continue to drop significantly after the upcoming Feb. 24 Q4 earnings release.
This is clearly not the time for investors to try to catch a falling knife. This is a situation where it might be better to wait for the stock to crater.
It will behoove investors to let SQ stock languish at a very low price for a while. Wait until all hope for an earnings turnaround is gone and the last ebullient investors are out of the stock. That way you know that you are getting a bargain. Unless there is a clear catalyst that could push it higher immediately after the earnings, most astute investors will wait.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) 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.