Is it too late to buy block shares?

After hitting lows in October not seen since the outbreak of the pandemic, fintech is an all-star Block (SQ -5.13%) has rallied 11% higher, overcoming concerns about the meltdown happening across the cryptocurrency space.

Nevertheless, the payments leader’s shares are still down 62% in 2022, and there are prospects for a recession that will hit early next year. Inflation and energy prices remain high despite recent setbacks, and the Federal Reserve is still raising interest rates to show it remains hawkish on rising prices and costs.

Block’s business is sensitive to the economy, so it’s not surprising to see the market giving mixed signals about the stock. Let’s see if the fintech stock has run its course for now or if it can still move higher.

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Adds a third leg to stand on

Block has long relied on merchants using the Square payments ecosystem for its massive growth over the past decade, but recently it has seen remarkable growth in its peer-to-peer mobile payment app Cash App.

In the third quarter, where point-of-sale profit jumped 29% to $783 million, Cash App gross profit increased 51% to $774 million. It ended the period with 49 million users and a record-breaking access of $52 billion.

And now Block has a new avenue for potential growth: buy-now-pay-later (BNPL) specialist Afterpay, which it bought for $29 billion earlier this year. Although Block still faces a complex integration process, Block is looking to the BNPL executive to serve as a bridge for commerce between Square and Cash App. Not only does the Cash App allow users to pay Square merchants, but the addition of Afterpay could add BNPL to the mix, giving Block a better opportunity to reach a wider audience.

A measure of increasing risk

But Block faces significant competition in BNPL. apple launched Pay Later, Walmart recently announced it would enter the market, and PayPal has Venmo, the peer-to-peer cash transfer leader.

And that’s in addition to a potential economic downturn. Higher interest rates and fewer loan options, especially for households with lower incomes, could lead to greater defaults. Morning Consult found earlier this year that 33% of BNPL users had overdrawn their bank accounts in January.

In a supplementary note Block filed in November, it said that after acquiring Afterpay in January, it changed its non-performing account policy to write off bad BNPL loans after 180 days instead of 90 days to allow people to continue spending on their loans . About 17% of BNPL loans are past due as of September 30, compared to 15% at the end of June, but perhaps more worryingly, the number of loans that are 90 days or more past due has now increased by 57% over the past . three months.

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An opportunity for cash

However, Block continues to be boosted by the potential offered for further expansion by Square, which is seeing increased subscription-based revenue growth, while Cash App is enjoying a massive uptick in users taking advantage of the app’s instant transfer capabilities. That should allow Block to increase the margin growth it is witnessing.

the German bank analyst Bryan Keene sees Cash App as Block’s “potential sleeping giant” that could grow gross profit above 20% a year. He believes it can become a digital wallet of the order of magnitude Alibabais Alipay or Tencent‘s WeChat in Asia.

In fact, Wall Street remains quite bullish on Block despite the headwinds a recession can bring. Nearly 90% of the 37 analysts covering the stock have a buy rating on the stock with a price target of $115 per share, implying 60% upside for the stock. It could triple in value if the high target of $210 per share is reached.

No need to rush

Even with the drop in Block’s price, it’s still not trading at a discount. Shares go for about 2.3 times sales and almost 44 times next year’s earnings. While I think Block is an excellent long-term play, the BNPL market adds some risk if a recession occurs and we see consumers having a harder time paying now before any official declaration has been made. It is also closely related to Bitcoinwhich has lost over 60% of its value this year.

So as much as I like Block going forward, I would be hesitant to buy here. In short, you haven’t missed the boat and there is still time to wait for better prices to offset the increased risk.