TMT Earnings Trade Alert #1
TMT looks into Block and dives into the upcoming earnings release tonight.
In the future I will be doing more of these, but not on a regular schedule. They will come when they come, more than likely around earnings season as I look for potential trades. Now let’s get digging…
Square, now known as Block, Inc. (formerly Square, Inc.), is a financial services and digital payments company founded by Jack Dorsey and Jim McKelvey. Block operates globally, providing a wide range of products and services aimed at empowering businesses and individuals with innovative financial solutions. Here's an overview of what Block does:
Payment Solutions: Block offers point-of-sale (POS) systems, including hardware and software, that allow businesses to accept card payments. This is the core service that Square initially became known for. It's designed to simplify the payment process for both small and large businesses.
Financial Services: Beyond payment processing, Block provides a suite of financial services. This includes Square Banking, which offers business loans (through Square Capital) and deposit accounts, making it easier for businesses to manage their finances.
Cash App: One of Block's most popular products is Cash App, a mobile payment service that allows individuals to send and receive money instantly. Cash App also offers additional features like investing in stocks and bitcoin, making it a versatile financial app for consumers.
Square Online: Block offers tools for businesses to create online stores, integrating their physical and online sales. This service includes website building, online ordering, and shipping tools, helping businesses to expand their reach beyond brick-and-mortar locations.
TIDAL: In 2021, Block acquired a majority stake in TIDAL, a subscription-based music streaming service. This move was aimed at providing new avenues for artists to distribute their work and for fans to support them directly, indicating Block's interest in expanding into the entertainment and cultural sectors.
Developer Platform: Block provides APIs and SDKs for developers to build applications that can utilize Block's payment processing, e-commerce solutions, and other services. This allows for customization and integration of Block's services into a wide range of business models and applications.
Blockchain and Cryptocurrency: Block is also actively involved in blockchain technology and cryptocurrency. Through Square Crypto (now known as Spiral), Block contributes to Bitcoin development, reflecting its commitment to pioneering open and accessible financial systems.
Analysts expect Block to report fourth quarter revenue of $5.70 billion.
The company reported revenue of $4.65 billion in last year's fourth quarter. Block has beaten analysts' estimates for revenue in the last six straight quarters.
Analysts expect Block to report earnings per share of 59 cents, compared to 22 cents in the prior year period. The company has beaten earnings per share estimates in three of the last four quarters and five of the last six quarters.
Analyst’s thoughts:
A focus on profitability could see Block terminate unprofitable businesses, Wedbush analyst Moshe Katri said in an investor note.
The analyst raised the rating from Neutral to Outperform on Block and raised the price target from $70 to $90.
Katri highlights commentary from Block management saying 2024 could be the company's "strongest year of profitability."
JPMorgan analyst Tien-Tsin Huang said Block could set its Rule of 40 targets to come in earlier than expected. The rule of 40 references sustainable profits with revenue growth and profit margins over the 40% level when combined.
The analyst has an Overweight rating and $90 price target.
Here are other recent analyst ratings and price targets on Block:
Benchmark: Initiates with a Buy rating, $89 price target.
BTIG: Upgrades from Neutral to Buy, $85 price target.
Mizuho: Buy rating, raises price target from $90 to $99.
Barclays: Ramsey El-Assal Raises Overweight $100 from $95
BMO Capital: Rufus Hone Lowers Outperform $84.00 from $93.00
Wedbush: Moshe Katri Maintains Outperform $90.00
PayPal a peer to Block beat earnings and revenue estimates from analysts but saw shares fell after guidance came in weaker than expected and commentary from the company suggested a transition year.
Analysts and investors will be looking for positive commentary on growth and momentum for Block heading into 2024. This is something I expect to hear tonight from Blocks management giving an upbeat conference call.
The company was reported to have layoffs of 10% of its workforce in January. Block previously said it would cap the number of people at the company at 12,000 until the growth of the business improved.
Just today 2/22/24 Block Inc plans to cut 112 jobs on March 30, the fintech said in a legally mandated notice, as part of its previously disclosed plans to trim headcount and reduce costs.
The notice was issued under the Worker Adjustment and Retraining Notification (WARN) Act which requires employers to provide a 60-day notice before layoffs, according to the Department of Labor & Workforce Development website.
The company, which also owns Spotify rival TIDAL, began to cut jobs in January, a person familiar with the matter told Reuters at the time.
At the end of the third quarter, it employed just over 13,000 people and has committed to reducing it to 12,000 by the end of 2024.
The California-based payments firm said in November that it expects to cut jobs and embark on a broader cost-savings program by the end of 2024.
Another item to monitor could be a commentary on Block's Cash App unit, which recently attracted the attention of a report showing that federal regulators are investigating how the payments potentially facilitate terrorist activities. Commentary from the company in this aspect could be useful for investors and analysts to know if Cash App could be negatively impacted or to see additional safeguards put in place.
How will I trade this earnings report?
Looking at the daily chart below, we have a range that the stock has been trading in for most of 2024 between roughly $60-$70.
Support at the $60 level also has some additional support from the 200 SMA.
If earnings don’t come in better than expectations, I expect a test of the 200 SMA, as they often beat estimates. Rival PayPal exceeded expectations in both sales and earnings.
If that level was to fail, the $52.50-$55 would be in play. I don’t expect this to happen as I put this scenario at about 25%.
On the upside, I put about a 60% chance we see the $70 level post earnings and a move through the recent highs of $71.41 would give potential upside to the $80 level.
So, for that reason I’m taking a March 15th, $65/$80 vertical spread which I bought the 65s and sold the 80s in equal quantities today.
Max risk is $5.00
Max gain is $10.10
Options expire on March 15th. If we break above $70 tomorrow or stay in the range, I will hold them.
If we breakdown under $60 or a move toward $80, I will look to sell.
Often, I enter trades for earnings on the day that the company has the release. Like today, we can get some news (Job cuts) that may make buying more expensive, but with this range we have been in, I’m ok with it. I feel good about a move out of this range post earnings.
Well, that’s a wrap for today. Next time I will try to get these types of report out early in the day, or even the week. Have a good one.
Eric
Not a buy - +3.78 (5.03%)past year - nothing to accelerate growth
Great post! Like the block logo too