Is Block one-upping Zip shares with its double-digit growth?

Young woman using computer laptop with hand on chin thinking about question, pensive expression.

Young woman using computer laptop with hand on chin thinking about question, pensive expression.

The Block Inc (ASX: SQ2) share price has gone up by more than 6% after the payments business announced more growth in the final quarter of its 2022 financial year. Meantime, Zip Co Ltd (ASX: ZIP) shares are not having a strong finish to the week – they’re down 1.89%.

It has been a very different 12 months for two of the biggest buy now, pay later (BNPL) businesses in the world. Let’s check Block’s share price movement, shown in the chart below.

Amazingly, the Block share price is at the same level as it was 12 months ago. That’s largely thanks to a 25% rise in 2023 to date.

However, the Zip share price is down around 75% over the past year, including a 6% fall in 2023 to date.

Block’s fourth quarter

The ASX payments share announced that in the fourth quarter, it generated gross profit of $1.66 billion, which was an increase of 40% year over year.

Square’s gross profit increased 22% to $801 million, while the cash app gross profit jumped by 64% year over year to $848 million.

Block’s adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) jumped 53% to $281 million.

However, it did report a net loss of $114 million in the fourth quarter of 2022. That compares to the $15 million loss in the third quarter of 2022 and the $77 million loss in the fourth quarter of 2021.

This meant that while 2022 gross profit jumped 36% to $5.99 billion, adjusted EBITDA dropped 2% to $991 million, while the net loss came in at $541 million.

Adjusted EBITDA didn’t increase; it’s still close to that $1 billion level.

Zip still making cash losses

Zip’s latest result – for the six months to 31 December 2022 – didn’t quite reignite investor interest. Indeed, the Zip share price is down more than 25% in the past month.

While it revealed revenue growth of 19% to $351 million and cash gross profit up 20%, its ‘core cash EBITDA’ came in at a loss of $33.2 million, though this was an improvement of $27.3 million from the $60.5 million loss in the FY22 first half.

But, there were some positive signs, including the revenue margin improving by 50 basis points year over year to 7.1%. Credit losses were 1.9% of total transaction value (TTV), an improvement from 2.4% in the HY22 result.

Zip also said it’s going to take actions to divest, restructure, or wind down these businesses, which is expected to “neutralise cash burn and deliver additional cash inflows during the second half of FY23″.

The company believes it has the strategy and funding runway to deliver group positive cash flow during the FY24 first half.

Zip said that it had $78.5 million of available cash and liquidity at 31 December 2022.

Block is winning the race

Not only is Block’s cash profit improving at a faster rate, but it’s also making substantial profit while it grows. Zip is still trying to make itself sustainable, and it doesn’t have a lot of spare liquidity, though the numbers are trending in the right direction.

Ultimately, I think businesses should be valued based on how profitable they can be in the future. Block seems to be doing a better job at being sustainable than Zip, for now. The changing interest rate environment has really pulled the rug out from under Zip’s momentum.

I also think Block’s underlying earnings make Block shares more attractive than Zip shares.

The post Is Block one-upping Zip shares with its double-digit growth? appeared first on The Motley Fool Australia.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for over ten years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the ‘five best ASX stocks’ for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now…

See The 5 Stocks
*Returns as of February 1 2023

(function() {
function setButtonColorDefaults(param, property, defaultValue) {
if( !param || !param.includes(‘#’)) {
var button = document.getElementsByClassName(“pitch-snippet”)[0].getElementsByClassName(“pitch-button”)[0];[property] = defaultValue;

setButtonColorDefaults(“#0095C8”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#0095C8”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#fff”, ‘color’, ‘#fff’);

More reading

Motley Fool contributor Tristan Harrison 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 and Zip Co. The Motley Fool Australia has positions in and has recommended Block. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

from The Motley Fool Australia

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s