‘The environment has changed’: Can Block shares maintain growth AND profitability into 2023?

Block Inc (ASX: SQ2) shares are posting a strong comeback today after selling off sharply on Friday.

Block shares closed 7.8% lower on Friday following the release of the ASX buy now, pay later (BNPL) share’s second quarter financial results.

Among those results, the global payments provider, which acquired Afterpay in January, reported a 6% year-on-year fall in total quarterly revenue of US$4.4 billion.

While quarterly gross profit was up 29% year on year to US$1.47 billion, Block recorded net loss of US$208 million and said it expected growth to slow in the current quarter (Q3).

While that saw investors hit the sell button on Friday, in trade today, Block shares are up 6.01% to $125.41.

Can Block maintain growth and profitability?

Addressing the outlook for Block shares in a post-Q2 earnings call, Block CFO Amrita Ahuja said the company will significantly scale back planned growth investments in light of potential uncertainties ahead.

According to Ahuja (lightly edited for readability):

Moving to our planned investments for the third quarter and remainder of the year, while gross profit trends have been healthy through July, we recognise the importance of exercising discipline with our investments as we enter a period of potential uncertainty.

As a result, we’re reducing our planned investments for the full year 2022 by US$250 million. We pulled back on experimental and less efficient go-to-market spend, adjusted risk loss estimates based on more current trends, and slowed the pace of hiring.

Responding to a question from Tien-Tsin Huang from JP Morgan regarding how Block is balancing growth efforts and profitability, Ahuja said:

We are continuing to invest given the vast market opportunities we see. But we also recognise that the environment has changed and we’re prepared to adapt to uncertainty and maintain discipline by pulling back on some of the discretionary operating expenses, particularly those that are less efficient.

So, our actions today show that we’re also focused on demonstrating greater near-term profitability as we head into what could be a more volatile macro environment.

In only the first six months here this year, we pulled back on our full year opex [operational expenditure] by 8%, or US$450 million, US$250 million of which came today across three primary areas: sales and marketing; risk loss, which as you know is both an input and an output for us; and hiring.

This shows how we can dial our knobs in real time and be disciplined.

How have Block shares been tracking?

Block shares have struggled this year, alongside the wider BNPL industry.

Since listing on the ASX on 20 January, the Block share price is down 29%. For context, the S&P/ASX 200 Index (ASX: XJO) is down 5% over that same period.

The post ‘The environment has changed’: Can Block shares maintain growth AND profitability into 2023? appeared first on The Motley Fool Australia.

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Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Block, Inc. The Motley Fool Australia has positions in and has recommended Block, Inc. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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