Morgan Stanley analysts downgraded Block Inc. (SQ) shares to Underweight from Equal Weight on Thursday, citing “high market penetration and limited additional opportunity to expand banking/credit services for Cash App.”
They also reduced the 12-month target price on the stock from $62 to $60.
Block shares fell 3.6% in premarket trading.
Morgan Stanley notes that the market is optimistic about SQ’s ability to notably expand its margins, mainly through cost reductions, while also achieving sustainable gross profit growth in the high-teens for Cash App and revitalizing growth in Square (NYSE:SQ) Seller volumes.
In contrast to those views, the Wall Street giant’s analysts believe there is a risk to Cash App’s growth prospects in the long term, based on their “demographic analysis of the US Gen Z and millennial population, Cash App's already high market penetration, and limited incremental contribution from a potential new credit card and additional banking services.”
“Similarly, we're unconvinced about Block's ability to sustainably reaccelerate Square Seller growth based on medium-term headwinds we've identified,” the team wrote.
They now project Cash App gross profit forecasts for Block at $4,906 million in 2024, down from a previous estimate of $4,993 million and below the consensus of $5,054 million.
For 2025, the estimate is set at $5,503 million, reduced from an earlier $5,795 million and lower than the consensus of $5,923 million. These adjustments anticipate growth rates of 14% and 12% for 2024 and 2025, respectively.