Before the Federal Reserve changed its stance on monetary policy, to forbid (New York Stock Exchange:mint) Investors love stocks.
The company formerly known as Square looked ready to head for $300. Instead, the impending interest rate hike frightened investors. Even financial companies like Wells Fargo (New York Stock Exchange:WFC) And American bank (New York Stock Exchange:buck) pulled back.
What happened? How does the decline in the financial statements relate to the decline of a fintech company like Block?
Markets had expected the Fed to raise interest rates by only 25 basis points. Instead, the Fed has alarmed the market by proposing three rate increases this year, more in 2023, and still more in 2024.
Higher rates widen price spreads, which should benefit banks. On the contrary, Fed policy may slow down the economy. This would hurt Banks and Block.
Aggregate transaction volumes will weaken if the economy slows. As business declines, shareholders cannot justify stock valuations. SQ shares are traded with premium valuations.
For example, the P/E ratio is about 3.6 times. BAC stock is trading at 0.55 times PEG. Block has no room to disappoint investors with poor quarterly results.
Markets seem to be selling SQ shares in advance and asking questions later.
A closer look at SQ’s stock
Block acquires Afterpay. The acquisition will enhance and enable greater integration between the vendors and the Block’s Cash application ecosystem. Block will issue shares for a payment of $29 billion (valuation at the time of the announcement on August 1).
Afterpay served more than 16 million customers and nearly 100,000 merchants worldwide, as of June 30, 2021. The service allows customers to control their spending habits. After payment, Block will benefit by increasing repeat business. The higher the average size and number of transactions, the more revenue you will receive as a ‘post-pay’.
Customers will benefit from the acquisition. They will get better financial products and services. Merchants will also benefit, regardless of their size, as the deal gradually increases their revenue.
Last month, Afterpay shareholders were unable to vote on the deal during a shareholder meeting. Block revealed that it received no opposition from the Bank of Spain. Expect companies to receive regulatory approval in mid-January. While the delay is no big deal, markets reacted negatively to the news.
Another possible explanation is that selling momentum accelerated towards the end of 2021, mostly due to the tax loss selling.
Cluster has some risks
Daily incidence rates of omicrons worldwide are a concern. Governments impose closures and restrictions. Markets anticipate that these measures will hurt spending behaviour. Credit card companies may experience lower transaction volumes.
As companies compete to increase market share in the payments sector, more efficient companies will thrive.
for example, Visa (New York Stock Exchange:FifthLow quarterly operating expenses. You will generate strong operating margins despite the low volume of payment transactions. Conversely, Block operates through the costs associated with the acquisition of Afterpay. V stock looks much safer than SQ stock in times of economic uncertainty.
Fintech underperformance may last longer. Visa and Master Card Credit Card (New York Stock Exchange:MAI recovered while Amazon.com (NASDAQ:AMZN), Block and PayPal (New York Stock Exchange:PYPL) poor performance.
Investors may benefit from an unexpected and sudden dip to buy PYPL, SQ and AMZN shares. Visa and Mastercard are also good investments that trade at reasonable valuations.
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Block has received a handful (out of only six) new analyst reviews in the past month. Readers may need to ignore analysts’ price targets that are more than a month old.
They may release updated reports with a less bullish tone, in light of the stock’s decline. According to Tipranks, the average price target is $285.00.
In the above table, Block achieved a solid growth score of 88/100. Investors should expect the amount of square payments to increase, regardless of the pandemic.
More merchants are moving to digital payments. They offer Square as an option and replace Mastercard or Visa. Merchants save transaction fees. This allows them to pass on cost savings to customers through lower product prices.
Fintechs may increase their market share in the coming years but they will not completely replace credit card companies. The markets need all options. Growth investors may benefit from stock market panic by holding SQ stock after a dip.
Square’s growth will not slow. The name change to Block signals a larger shift in the business that will lift the payments business and the Bitcoin market.
The company has proven that it knows how to grow the Cash app. The downside to adding the BLOCK chain or cryptocurrency to its name is the high volatility. The stock may swing when the bitcoin price goes up and down.
Seasoned investors may appreciate that Block’s core business will continue to grow. As it adds support for Bitcoin in facilitating transactions, Block will attract more people. This will raise her client base and help her business thrive.
At the date of publication, Chris Lau did not (directly or indirectly) hold any positions in the securities mentioned in this article. The opinions expressed in this article are those of the author, and are subject to InvestorPlace.com’s posting guidelines.
Chris Lau is a contributing author for InvestorPlace.com and several other financial websites. Chris has over 20 years of stock market investing experience and runs a do-it-yourself marketplace for value investing on Alpha Search. He shares his stock picks so readers get original insight that helps improve investment returns.