Buoyed by a holistic growth model, Block SQ has gained 47.9% over the past year, outperforming the Zacks Business-Services sector's rally of 26.9% and the S&P 500's return of 31.1%.

However, the company has underperformed its industry's rise of 62.9% in the same time frame.

Block's strong positioning in the digital payments industry on the back of its robust payment and point-of-sale (POS) solutions, which include both hardware and software to accept payments, streamline operations, and analyze business information, is a major positive.

SQ's comprehensive commerce ecosystem, which enables sellers to combine software, hardware and payment services to accept payments from customers, helps it sustain solid momentum across sellers. Strength Square ecosystem is a plus.

One-Year Price Performance

Despite this positive scenario, market uncertainties, high inflation, unfavorable foreign exchange fluctuations and sluggish trends in consumer spending are concerning for the company. The normalization trend in the post-pandemic era is negative.

The combination of both risks and rewards is prompting investors to question how they should play the SQ stock.

Block Rides on Portfolio Strength

Block has been gaining solid momentum among several sellers across various industries, such as food, retail and services, and geographies, including the United States, Japan, Australia and Canada. The primary factor behind this remains its robust product portfolio, which, in turn, is increasing its Gross Payment Volume (GPV). In the second quarter of 2024, the company processed $61.94 billion of GPV, up 5% year over year.

SQ's omnichannel offerings, which help sellers create differentiated customer experiences on the back of customer insights by managing orders from POS and eliminating manual aggregation of online and in-person orders, are adding strength to its seller base.

Growing momentum across the Square ecosystem and CashApp ecosystem, which enables the company to provide peer-to-peer payment and digital commercial transaction facilities, is another positive.

Block leverages artificial Intelligence to deliver an enhanced seller experience. Square Online's Themes and Square for Retail's AI-generated product descriptions help sellers enhance their customer engagement and automate sales.

Square offers generative AI features to sellers, enabling them to automate operations, speed up workflows and save time.

Block is constantly gaining momentum in the cryptocurrency market on the back of CashApp, which allows users to buy, sell, send and receive bitcoins.

Its decentralized TBD platform, which enables developers to build decentralized finance applications that run on programmable blockchains, is noteworthy.

Block's self-custody bitcoin wallet, Bitkey, is also boosting its presence in the cryptocurrency space. The company offers Bitkey in more than 95 countries across six continents, allowing users to easily and safely own and manage their bitcoins.

Strong Partner Base Aids SQ's BNPL Prospects

Block's Afterpay division and strong partner base are boosting its prospects in the ‘buy now, pay later' (BNPL) market.

Afterpay's partnership with several brands, including Curology, Helzberg Diamonds, Journeys, Rawlings Sporting Goods and Zenni Optical, is noteworthy. These partnerships help Afterpay to deliver an enhanced shopping experience to U.S. customers.

Afterpay also collaborated with various merchants, including Diane von Furstenberg, Diggs, For Eyes and Kendra Scott, to offer installment payments for purchases from these merchants.

Afterpay's partnership with Rokt in a bid to boost the online shopping experience for customers is another positive. This partnership enables Afterpay and its retail partners to provide relevant advertising experiences to targeted customers during the checkout process using Rokt's e-commerce solution.

SQ's Rising Estimates

Block's near-term as well as long-term prospects are expected to benefit from compelling products and solutions, a comprehensive payment ecosystem, and a strong position in the digital payment industry.

For the third quarter of 2024, the Zacks Consensus Estimate for revenues is pegged at $6.17 billion, implying year-over-year growth of 9.8%.

For 2024, the Zacks Consensus Estimate for revenues is pegged at $24.52 billion, implying year-over-year growth of 11.9%.

Attractive Valuation: A Silver Lining For SQ

Block offers an attractive valuation at current levels.

SQ is trading at a discount, with a forward 12-month Price/Sales of 1.58X compared with the industry's 6.33X. This reflects a good opportunity for the investors.

Challenges Being Faced by Block

Block has been grappling with weakening transaction activities on Cash App and softness in consumer spending trends in food and drink and retail discretionary verticals.

Broader market volatility is acting as a headwind.

Specific challenges associated with the security of payments and money transfer in the digital payments industry, and regulatory uncertainties in the cryptocurrency space are other concerns for SQ.

Increasing pricing pressure due to rising competition from the likes of PayPal PYPL in the peer-to-peer payments space does not bode well. SQ also faces stiff competition from Affirm AFRM in the booming buy now, pay later (BNPL) market.

Conclusion

Block's strong solutions portfolio, rising earnings estimates, strong position in the digital payments industry and attractive valuation present a compelling investment opportunity.

However, macroeconomic uncertainties and unfavorable changes in the consumer spending pattern, which surround Block's prospects at present, do not bode well.

With a Zacks Rank #3 (Hold), Block appears to be treading in the middle of the road, and investors could be better off if they trade with caution.

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