On Tuesday, Bernstein maintained its Outperform rating on Block Inc. (NYSE:SQ) with a steady price target of $85.00. The firm's analysis acknowledges the dual nature of Block as a company that has recently seen a significant revision in EBITDA expectations, which has shifted its perception among investors. Block's operational expenditure discipline has led to an increase in EBITDA projections by 30% since the last earnings report, enabling the stock to be valued on GAAP-like earnings at 21 times, excluding cash, for the year 2025.
Despite this positive adjustment, concerns remain regarding the deceleration in gross profit growth and the uncertain long-term trajectory. Specifically, the Square (NYSE:SQ) seller business is facing challenges in refining its market approach, and sales and marketing efficiency has weakened. Additionally, the growth of Cash App's monetization rate and inflows has stalled, despite some benefits to gross profits.
Bernstein's comprehensive review discusses potential avenues of growth for Cash App and the Seller business, as well as the changing drivers of profitability. The firm is optimistic that Block can sustain mid-teens growth in gross profit in the coming years. The analysis suggests that the recent growth pains are more reflective of internal issues rather than market size or competitive challenges.
For the Square seller business, Bernstein anticipates growth in gross profit driven by continuous improvements in market strategies. As for Cash App, the recent stagnation in user inflows and monetization, along with a slowdown in monthly active users, is thought to be a temporary setback pending the scaling of recent product launches and the introduction of new offerings.
Bernstein is closely monitoring developments in Commerce, including Cash App Pay, and Direct Deposit Penetration, which could enhance user trust and reduce friction. The firm also notes the potential for profitability expansion, pointing out that despite a 200% increase in headcount since 2019, including a reduction in force this year, operating expenses per employee remain high compared to peers. Interestingly, Cash App's profitability is now on par with that of Square, with its growth contributing positively to margins, a shift from its historical impact.
InvestingPro Insights
As Block Inc. (NYSE:SQ) navigates the dynamic financial services landscape, InvestingPro data highlights key metrics that reflect the company's current financial health and market performance. With a market capitalization of $42.38 billion, Block stands as a significant player in the industry. Despite not having been profitable over the last twelve months, the company has shown a robust revenue growth of 22.61% in the same period, emphasizing its potential for future profitability.
InvestingPro Tips indicate that Block is expected to see net income growth this year, which aligns with Bernstein's positive outlook on the company's EBITDA revisions and growth prospects. Additionally, with liquid assets exceeding short-term obligations, Block demonstrates a strong liquidity position that could support its operational needs and strategic initiatives. Furthermore, the company's stock price movements are characterized by volatility, which investors should consider when evaluating the risk associated with the investment.
With a significant 32.33% return over the last three months, Block's stock performance suggests a positive trend, although it's important to note that the stock has experienced a 10.39% decline over the past year. This juxtaposition of short-term gains against longer-term challenges encapsulates the dynamic nature of Block's market presence. For investors seeking further insights, there are additional InvestingPro Tips available on the platform, providing a deeper dive into Block's financials and market behavior.
For those interested in leveraging these insights, InvestingPro offers a comprehensive suite of tips and data. Readers can use the coupon code PRONEWS24 to receive an additional 10% off a yearly or biyearly Pro and Pro+ subscription, granting access to a wealth of information that can inform investment decisions. With 9 additional InvestingPro Tips available, investors can gain a nuanced understanding of Block's position and prospects within the financial services industry.
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