Since the name change, which is meant to reflect the blockchain technology that underpins most cryptocurrencies, was announced on Dec. 1, SQ stock has fallen about 36% to now change hands at $124.65 a share. The sharp decline brings the total losses in the company’s share price to 49.49% over the past six months.
Clearly, the name change and new identity have not been well-received by investors on Wall Street and Main Street. In fact, things have gotten so bad for Block that it was recently reported that accounting firm H&R Block (NYSE:HRB) is suing the company over the name change. Ouch!
The rebranding of Square into Block coincided with the announcement that company founder and Chief Executive Officer (CEO) Jack Dorsey was leaving his dual role leading Twitter (NYSE:TWTR), which he also founded, in order to concentrate full-time on the digital payments company.
At first glance, this would seem like a good thing for Block, and many shareholders had called for Dorsey to stop dividing his time and energies trying to run two large cap tech companies at the same time. However, the rebrand into Block seemed to reinforce that Dorsey, who is a notorious crypto bull, plans to move Block deeper into the world of digital coins and tokens, which remains a highly volatile sector.
In recent quarters, Block’s financial results have been impacted by its holdings of Bitcoin (CCC:BTC-USD), which currently trades at a price of $38,854. Bitcoin has remained volatile to start the year, with its price down 11% in a little more than two weeks of trading. Other cryptocurrencies have experienced similar declines. Given the volatile nature of Bitcoin, many investors are shunning Block as they reposition their portfolios into less-risky assets. However, many analysts see the selloff in SQ stock over the past two months as being overdone, with analysts urging investors to buy shares now that they are deeply discounted.
Block’s first big announcement following the rebrand was that it is building a Bitcoin mining system with the goal of making it easy for anyone to buy a mining rig and start accumulating their own cache of the digital asset. While cheered by crypto advocates, the announcement seems to have only depressed SQ stock further as it falls from one 52-week low to another. Bitcoin revenue generated by Block in the first three quarters of 2021 amounted to $8.1 billion, up 76% from $4.6 billion in the same period of 2020.
Strong Payments Business
The gutting of SQ stock seems to be ignoring the fact that the company continues to operate a very profitable online payments business. Block’s “Cash App” continues to be beloved by small business owners and consumers.
Cash App’s popularity comes from its diversity. People can use it to make payments, bank, purchase Bitcoin, and even trade stocks. It’s like an all-in-one finance app. The continued growth of Block’s payments business has kept its earnings reasonably strong. For the third quarter (Q3) of last year, Block reported that its total revenue increased 27% year-over-year to $3.84 billion. Unfortunately, the company missed Wall Street revenue estimates by $640 million. Earnings per share (EPS) came in at $0.37, which matched consensus estimates.
In terms of valuation, Block currently trades with a price-to-earnings (P/E) ratio of 123.81, which is about 3x higher than the P/E ratio of rival PayPal (NASDAQ:PYPL) at 40.56, and more than 5x greater than the sector’s median P/E ratio of 24.60.
So, even though Block’s share price has fallen substantially in the past few months, it is still valued quite high and looks expensive compared to its peers. As the threat of higher interest rates pushes investors into securities with lower valuations, SQ stock could continue to get hit in coming weeks and months. It certainly doesn’t appear that Block has bottomed at its current level.
Wait on SQ Stock
For better or worse, Block is now viewed as a cryptocurrency play. The rebranding has only cemented the view that the company is focusing on digital coins and tokens going forward and less on its online payments business.
While the company hasn’t abandoned its Cash App, it is clear that the company is preoccupied with the development of a Bitcoin mining rig and other crypto-related projects. And the continued volatility in the price of cryptocurrencies has spooked investors out of Block shares. While there’s still a lot to like about Block, the company needs to find its footing with its various crypto ventures before it becomes safe to take a position. For now, investors should steer clear of Block. SQ stock is not a buy.
On the date of publication, Joel Baglole held a long position in SQ. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.