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Earnings Outlook: Block earnings promise many moving parts, but Square’s parent company may have a secret weapon

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Square recently changed its name to Block Inc. in a bid to better encompass the diversity of its business, and the company’s Thursday earnings report will highlight just how many stories have been rolled into one.

Block
SQ,
+2.62%

was a tale of two businesses in the early part of the pandemic, as its seller segment saw growth constrained by restrictions on in-person activities, while its Cash App segment benefited from an influx of stimulus funds and rising interest in trading activity. On the surface, that meant Block’s seller business was set up for a rebound in in-person spending headed into this year, while its Cash App business would face tough comparisons to a period aided by stimulus disbursements.

Don’t miss: Square changes its name to Block as business expands

The latest macroeconomic developments, however, add another wrinkle to the spending narrative.

“On one hand, SQ appears to be in the crosshairs of cyclical sensitivity, given its SMB [small- and medium-size business] bend within the seller merchant base, and outsized exposure to ‘low-end consumers,’ which many are anticipating will be the first cohort to rein in discretionary spend amid a downturn,” SMBC Nikko Securities America analyst Andrew Bauch wrote in a note.

Bauch also noted that commentary from airlines and online-travel companies suggests strong demand headed into the summer, positioning Block to benefit as consumers prepare to spend money “away from home” on areas like retail and restaurants.

Add to the mix that Block’s business has changed over the past few years as the company has added new layers through acquisitions. Block now has exposure to the buy-now pay-later, or BNPL, industry thanks to its acquisition of Afterpay, which closed earlier this year.

Read: Square revamps Stand hardware with integrated dip and tap payments

Afterpay brings some complexities, including uncertainty about the trajectory of the BNPL industry. Bank of America analyst Jason Kupferberg recently highlighted third-party data indicating “decelerating growth” in BNPL app downloads more generally, versus tough comparisons from a year before. He wrote that he was bullish on the industry, though he acknowledged that he was also “mindful of potential risks of higher inflation and interest rates.”

Jefferies analyst Trevor Williams saw “noise” ahead of the report, pinpointing “inconsistent treatment of Afterpay in Street models.” Not all analysts have included it in their models, he wrote, and there was a “wide range from those who have.”

Block’s Cash App also now houses Credit Karma’s former tax-preparation business, and Bauch sees the company’s ability to monetize this area as “the biggest variable” for Block in the quarters to come. The tax-prep business allows Block to capitalize on a potential surge of tax refunds coming into the Cash App, which consumers would then have the chance to spend or invest.

See also: Once the Square CEO, Jack Dorsey is now officially ‘Block Head’

Assuming the Cash App processes 1.5 million tax returns generating a $2,000 refund on average, Block would see $3 billion of funds come into the app. If the company were to monetize that amount at the same rate it has historically, Bauch calculates that the initiative could result in about $600 million in incremental gross profit.

This potential “is largely excluded from sell-side and buy-side models,” he concluded.

Wolfe Research analyst Darrin Peller added that the tax-prep business “could have a similar effect on the ecosystem as pandemic government stimulus payments.” He saw the potential for Cash App Taxes to boost monthly active users and noted that his research suggested “a strong share of customers are inflowing refunds directly into Cash App despite SQ not making it mandatory.”

Here’s what to expect in the company’s May 5 report.

What to watch for

Earnings: Analysts tracked by FactSet project that Block earned an adjusted 20 cents a share in its latest quarter, down from 41 cents a share a year earlier. According to Estimize, which crowdsources projections from hedge funds, academics, and others, the average estimate is for 27 cents a share.

Revenue: The FactSet consensus calls for $4.14 billion in revenue, down from $5.06 billion a year before. On Estimize, the average projection is for $4.15 billion in revenue.

Analysts tend to prefer looking Block’s gross profit rather than its revenue, since the top line is distorted by factors such as Cash App’s bitcoin
BTCUSD,
+5.89%

-trading feature, which brings in considerable revenue at minimal profit. The FactSet consensus is for $1.3 billion in gross profit, up from $964 million a year before.

Stock movement: Shares of Block have gained following three of the company’s past five earnings reports. They rocketed 26% after the most recent report.

Still, the stock has been cut by more than half over the past 12 months, as the S&P 500
SPX,
+2.38%

has risen 1.7%.

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