Financial technology company Block (NYSE:SQ) stock is not without risks, but its outlook is strong enough to warrant consideration from investors.
The combination of strong third-quarter financial results and a rally in cryptocurrencies have some feeling positive about Block for the first time since the end of 2021. With SQ stock up 26% in the last month but still far from its 52-week high, now would be an opportune time to take a position.
Improving Results
SQ stock has been on an upswing since the company posted a Q3 print that was so good, it seemed to catch analysts and investors off guard. Block soundly beat forecasts on both the top and bottom lines and showed vigorous growth in its popular Cash App and Square revenue streams.
Specifically, the company announced earnings per share of 55 cents versus 47 cents that was expected among analysts. Revenue totaled $5.62 billion compared to $5.44 billion that was forecast.
Block also endeared itself to analysts by raising its forward guidance, saying it now expects full-year operating income of $205 million to $225 million, a massive increase from previous guidance of just $25 million.
The company added that it expects a 2023 gross profit of $7.44 billion to $7.46 billion. On an earnings call, Block CEO Jack Dorsey said the company will focus on growing its payment app with restaurants and services businesses going forward. SQ stock rose 16% the day after the Q3 print.
Crypto Investments
Block continues to be heavily invested in cryptocurrencies and the blockchain technology that supports digital coins and tokens. In fact, Dorsey renamed and rebranded the company, originally called Square, as Block to reflect the heavy focus on blockchain technology.
The company continues to be a major holder of Bitcoin (BTC-USD) and other crypto. As such, sentiment towards Block soured when the “crypto winter” of 2022 took hold and prices for digital assets plummeted.
The crypto downturn coincided with the end of the pandemic and return to in-person shopping, a development that also hurt usage and demand for Block’s Cash App, further depressing the share price.
Peak to trough, SQ stock declined 85% between February 2021 and October of this year. However, the share price has improved recently along with Block’s crypto investments. The company said that its Bitcoin revenue in Q3 reached $2.42 billion, up 38% from $1.76 billion a year earlier.
Short Seller Report
While its finances and cryptocurrency investments are improving, Block’s stock has also taken a hit from a short seller report authored about the company this past spring.
SQ stock plunged 15% immediately after notorious short seller Hindenburg Research published a report alleging that the company falsely inflates its Cash App user numbers. Hindenburg described Block as taking a “Wild West” approach to compliance and internal control systems.
Worse, Hindenburg accused Block of engaging in “criminal activity” and that “fraud ran rampant on its platform.” Dorsey was quick to refute the Hindenburg report, saying that it is considering legal action against the short seller.
Block said the report is “factually inaccurate and misleading.” Since the report’s release in March, little else has happened, and the drama seems to have quieted down. The best that can be said about the Hindenburg report is that it doesn’t look like it will do long-term damage to Block.
Take a Chance on SQ Stock
Block isn’t a sure thing. The once red hot fintech space has cooled considerably since the heady days of the 2020/21 pandemic rally. With its heavy exposure to crypto, Block is vulnerable to any selloff in digital tokens. Investors should also be aware of the accusations made about Block by Hindenburg Research.
All that said, Block’s finances are improving, its outlook is bullish, and the crypto sector is rallying and outpacing equities. For these reasons, Block is worth betting on. SQ stock is a buy.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions 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.