Shares of fintech company Block (NYSE:SQ) fell over 2% on Friday. It announced Q2 results after market close on August 4, reporting revenue of $4.4 billion, and adjusted earnings per share of $0.18. Analysts tracking the stock forecasted Block to report revenue of $4.34 billion and earnings of $0.16 per share in the June quarter.
So, why did Block shares fall despite beating consensus estimates in Q2? First, it's possible that investors were wary of the company's revenue decline, as sales were down 6% year-over-year while adjusted earnings slumped 72% compared to the year-ago quarter.
Further, it was the second consecutive quarter where Block missed estimates, including gross profits and gross payment volume, reflecting the company's merchant base is struggling amid an inflationary environment.
Block's gross profit stood at $1.47 billion, compared to estimates of $1.495 billion. Its gross payment volume rose 23% to $52.5 billion versus estimates of $53.18 billion.
Let's see if Block stock can stage a comeback in the back end of 2022.
Despite a fall in revenue, Block's gross margin grew 29% year-over-year. In the last three years, its gross profits have expanded at an annual rate of 47%. Additionally, Block's gross profit for its Cash App surged 29% to $705 million. After excluding the acquisition of Afterpay, Cash App's gross profits were up 15%.
Block reported an adjusted EBITDA of $187 million, above estimates of $140 million. So, while gross profits in Q2 were $20 million lower than estimates, EBITDA in the quarter was almost $50 million above forecasts.
In Q2, Block experienced robust growth from mid-market sellers. It has also seen strong growth in the food and drink vertical, the company's fastest-growing vertical since 2017 on a gross profit basis. In the last two quarters, GPV from restaurant sellers more than doubled year-over-year.
Cash App is extremely crucial for Block's long-term success. In June, around 47 million accounts transacted on Cash App, and customer retention for active users was 31 percentage points higher in Q2.
Block continues to expand its ecosystem at an enviable pace. In Q2, Block launched a credit product known as Cash App Borrow, where users can access short-term loans for a fee. Here, customers can receive up to $600 that can be paid back via installments. In June, over 1 million monthly active users transacted on Cash App Borrow.
Block allows users to trade in Bitcoin on the Cash App platform. In a bull run, trading volumes are pretty heavy, allowing Block to increase sales exponentially. However, as market sentiment turns bearish, trading volumes plummet, driving sales lower.
If we exclude Bitcoin, total revenue for Block surged 34% to $2.62 billion in Q2. So, investors can now expect Block's stock price to be tied with the performance of Bitcoin.
Shares of Block are trading 70% below all-time highs, valuing the company at a market cap of $51.1 billion. Analysts expect sales in 2022 to rise by 0.6% to $1.76 billion, valuing Block at 3x forward sales.
However, its less than impressive profit margins suggest its price to forward earnings multiple is high at 100x. Analysts expect Block stock to surge over 35% in the next year.
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