Shares of financial-technology (fintech) company Block (NYSE: SQ) were up 23.8% in July, according to data provided by S&P Global Market Intelligence. This increase was in stark contrast to commentary from the analyst community, which overwhelmingly downgraded Block stock throughout the month.
However, fintech investors surprisingly responded positively to inflation data. This boosted Block stock and helped it outperform the 9.1% gain of the S&P 500.
To understand why the analyst community was lowering expectations for Block left and right in July, it’s important to understand the company’s business composition. Slightly more than half of the company’s gross profit in the first quarter of 2022 came from Block’s Square segment, which primarily serves small- and medium-sized businesses. These are particularly vulnerable to recessions.
There’s heated debate about whether the U.S. economy is currently in a recession. However, analysts don’t care as much about that as they care about what’s coming. According to a June survey by the Financial Times, 68% of economists surveyed said a recession was coming in 2023. Because of this perceived storm cloud on the horizon, analysts are downgrading many fintech stocks accordingly, including Block.
There’s one notable exception: Cathie Wood. Wood’s Ark Invest was a net buyer of Block stock during July, perhaps instilling a little confidence among retail investors.
However, the bigger driver for Block’s July outperformance was inflation data. It came out on July 13, showing 9.1% inflation for June, which is bad news on an absolute basis. And the Federal Reserve responded by raising interest rates aggressively, yet again.
However, Block stock started surging after these announcements. Perhaps investors are encouraged by the things being done to stabilize the economy. And if the market is starting to believe the worst is over, then it makes sense why Block stock performed so well.
Stocks can drift higher and lower, along with investor emotions in the short term. However, objective business data almost always wins in the end. For Block’s part, it will report this objective data when it releases financial results for the second quarter of 2022 on Aug. 4.
Block’s Square segment’s purchase volume was up roughly 29% in April, and its Cash App segment’s gross profit was up, too. But that’s about all management told us about Q2 revenue. However, Q2 expenses should be up, and stock-based compensation should be elevated, in part due to its acquisition of Afterpay. This could make Block’s results ugly on the bottom line.
It’s worth keeping an eye on Block’s profits. However, long-term investors should also look to see if the company is still gaining market share, users, and expanding into new products and services. If these things are ongoing, its long-term growth trend may compensate for current losses.