Block, Inc. (SQ) and its subsidiaries create tools that enable sellers to accept card payments and provide reporting and analytics and next-day settlement. On the other hand, VMware, Inc. (VMW) provides software solutions in modern applications, cloud management and infrastructure, networking, security, and digital workspaces in the United States and internationally.
Tech stocks have witnessed a steep sell-off this year due to the Fed’s tightening monetary policy, evident from the NASDAQ Composite’s 28.2% year-to-date decline. However, growing tech inclination in this digital era is expected to drive growth.
Moreover, as businesses become increasingly dependent on advanced technologies such as big data analytics and AI solutions, investment in this sector is expected to continue to accelerate. According to Insight Partners, the global big data analytics market is projected to grow at a CAGR of 15.3% from 2022 to 2028. This should bode well for both stocks.
Over the past year, SQ has lost 71.8%, while VMW has lost 26.5%. Moreover, SQ has lost 17.5% over the past month compared with VMW’s 4.2% decline.
Which stock is more attractive now? Let’s find out.
Latest Developments
In its latest quarter, SQ said, “We believe our Cash App and Square ecosystems are well-positioned to help our customers adapt and grow based on trends we have observed during recent quarters.”
On the other hand, on June 10, 2022, VMW was named a Visionary in the 2022 Gartner Magic Quadrant for Application Performance Monitoring and Observability, which marks a significant recognition.
Recent Financial Results
SQ’s total net revenue decreased 21.7% year-over-year to $3.96 billion for the first quarter ended March 31, 2022. Its operating loss came in at $226.79 million, compared to an operating income of $67.74 million in the year-ago period.
Also, its net loss came in at $204.20 million, compared to a net income of $39.01 million in the prior-year period, while its loss per share came in at $0.38, compared to an EPS of $0.08 in the previous period.
On the other hand, VMW’s total revenue increased 3.1% year-over-year to $3.09 billion for the first quarter ended April 29, 2022. Its subscription and SaaS revenue came in at $899 million, up 21.3% year-over-year, while its services revenue increased marginally year-over-year to $1.62 billion.
VMW’s net income came in at $242 million, down 43.1% year-over-year. The company's cash and cash equivalents came in at $3.72 billion for the period ended April 29, 2022, compared with $3.61 billion for the period ended January 28, 2022.
Past and Expected Financial Performance
SQ’s revenue grew at a CAGR of 66.5% over the past three years. Analysts expect SQ’s revenue to increase marginally in the current year and 20.6% in the next year. The company’s EPS is expected to decline 48.5% in the current year and grow 89.8% in the next year. Moreover, its EPS is expected to grow 13.6% per annum over the next five years.
On the other hand, VMW’s revenue grew at a CAGR of 8.8% over the past three years. Analysts expect the company’s revenue to increase 5.4% in the current year and 8.1% in the next year. The company’s EPS is expected to decline 11.6% in the current year and grow 14.8% in the next year. Its EPS is estimated to grow 6.9% per annum for the next five years.
Profitability
SQ’s 28.68% gross profit margin is lower than VMW’s 81.91%. Also, VMW’s 22.35% EBITDA margin is significantly higher than SQ’s marginal EBITDA margin. VMW’s net income margin of 12.65% is higher than SQ’s negative net income margin of 0.46%. Thus, VMW is more profitable here.
Valuation
In terms of forward EV/Sales, SQ is currently trading at 2.22x, lower than VMW’s 4.32x. However, SQ’s forward EV/EBITDA of 55.65x is 374.4% higher than VMW’s 11.73x.
POWR Ratings
VMW has an overall rating of B, equating to Buy in our proprietary POWR Ratings system. On the other hand, SQ has an overall rating of D, which translates to Sell. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
VMW has a Quality grade of B, consistent with its higher-than-industry profit margin. VMW’s trailing-12-month gross profit margin of 81.91% is 62.6% higher than the industry average of 50.38%. In contrast, SQ has a C grade for Quality, in sync with its 28.68% trailing-12-month gross profit margin, which is 43.1% lower than the industry average.
VMW has a Growth grade of C, consistent with its mixed financials in the last reported quarter. Comparatively, SQ has a D grade for Growth, in sync with its poor financials in the last reported quarter.
Of the 106 stocks in the Financial Services (Enterprise) industry, SQ is ranked #101. On the other hand, VMW is ranked #7 out of 55 stocks in the Software - Business industry.
Beyond what we’ve stated above, we have also rated the stocks for Value, Momentum, Sentiment, and Quality. Click here to view SQ ratings. Get all VMW ratings here.
The Winner
Given the robust demand for tech solutions and the advent of advanced technologies, the industry’s prospects look bright. Both SQ and VMW are expected to benefit from the industry tailwinds. However, VMW’s higher profitability and stable growth prospects make it the better buy here.
Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Financial Services (Enterprise) industry here and click here to access the Software – Business industry stocks.
SQ shares were trading at $69.85 per share on Friday afternoon, up $2.58 (+3.84%). Year-to-date, SQ has declined -56.75%, versus a -17.85% rise in the benchmark S&P 500 index during the same period.
About the Author: Riddhima Chakraborty
Riddhima is a financial journalist with a passion for analyzing financial instruments. With a master's degree in economics, she helps investors make informed investment decisions through her insightful commentaries.
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