On Thursday, Jefferies reiterated their Buy rating on Block Inc. (NYSE: SQ) stock, maintaining the price target of $110.00. The firm's analysis indicates that Block Inc. has effectively integrated changes to its compliance program, which should mitigate any further impact on the user base of its Cash App.
Jefferies highlighted that the adjustments, which have been underway for the past two years, are likely to have already been reflected in the current number of monthly active users (MAUs).
With a market capitalization of $52.55 billion and impressive revenue growth of 14.75% over the last twelve months, Block continues to demonstrate its strength as a prominent player in the Financial Services industry.
According to InvestingPro analysis, the company appears undervalued based on its Fair Value metrics, with strong financial health indicators including a current ratio of 2.07.
The settlement with regulatory authorities, which was addressed in a report to Block Inc. in November 2023, outlined the need for improvements in the company's Bank Secrecy Act/Anti-Money Laundering (BSA/AML) program. Block Inc. responded in December 2023 with a plan detailing the new controls it had put in place, along with additional enhancements to be implemented.
The analysts at Jefferies believe that these changes have been effectively absorbed, and that any impact on the growth of Cash App MAUs, due to factors such as reduced gross additions or increased churn of unverified users, has already occurred.
Despite these regulatory challenges, Block has maintained strong performance, with the stock delivering a 30.13% return over the past year.
InvestingPro subscribers can access detailed analysis of Block's regulatory compliance impact through comprehensive Pro Research Reports, available for over 1,400 US stocks.
In the fourth quarter of 2023, Block Inc. acknowledged in its shareholder letter that deliberate decisions were made over the past year that influenced the growth of active users on Cash App.
These decisions were part of the company's efforts to enhance compliance and user verification processes. The changes included more stringent onboarding procedures that required new users to provide additional information to become immediately eligible for services like the Cash Card.
Moreover, the company has adjusted the transaction limits for users without identity verification (IDV). Previously, peer-to-peer (P2P) users without IDV could transfer up to $1,000 per month; however, these users now face a lifetime limit of $1,500 and are ineligible for Cash Card or Bitcoin purchases. This policy shift is believed to have caused some lower-revenue MAUs to leave the platform.
The analysts at Jefferies suggest that the strategic changes made by Block Inc. to its compliance and user verification processes are comprehensive and have addressed the concerns raised in the regulatory settlement. The firm remains confident in the company's ability to manage its user base effectively moving forward.
In other recent news, Block Inc. has been making significant strides in its financial performance and growth prospects. Citi analyst Andrew Schmidt has upgraded Block's growth trajectory, citing the company's potential for a breakout year in 2025. This follows a 19% increase in the company's gross profit, reaching $2.25 billion, and an improved adjusted free cash flow of $1.5 billion.
Raymond (NS:RYMD) James has also restated its Outperform rating for Block Inc., emphasizing the company's Seller Gross Payment Volume growth, which is expected to accelerate into double digits in 2025. In addition, Block has entered a strategic partnership with global foodservice distributor Sysco (NYSE:SYY), aiming to offer advanced technology solutions to restaurants worldwide.
Monness, Crespi, Hardt, and BTIG have upgraded Block's shares, setting new price targets based on a positive outlook for the company's future performance. Block Inc. anticipates a 14% year-over-year growth for Q4 2024 and aims to achieve the Rule of 40 by 2026, focusing on mid-teens gross profit growth and a mid-20% adjusted operating income margin. These are recent developments in Block's strategy for continued growth.
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