By Sam Boughedda
Morgan Stanley cut its price target on Block (NYSE:SQ) to $70 from $72 per share in a note Tuesday, but MS analysts said they believe the company's Cash App service "has a significant opportunity to be a sizable financial institution."
The analysts, who have an Equal-Weight rating on Block, believe that "Cash App is a bank for Millennials and Gen Z."
Last week, Hindenburg research released a short report on Block, claiming it has "wildly overstated its genuine user counts" and that "former employees estimated that 40%-75% of accounts they reviewed were fake, involved in fraud, or were additional accounts tied to a single individual."
Block shares dropped more than 14% following the report.
However, the analysts are optimistic about the company's prospects, explaining they believe Block can become a key financial services provider for Millennials and Gen Z "as they mature, grow incomes, and borrowing needs, similar to how Capital One expanded its banking business by pursuing the Gen X population in the 1990s."
"Our survey work shows Cash App customers want a full suite of financial services. A majority of Cash App users in our proprietary AlphaWise digital wallet survey (conducted in December 2022) said they would be very or somewhat likely to use various banking services if offered by Cash App," the analysts added.
"At maturity, we expect Cash App will generate margins that are similar to other broad-based financial institutions (e.g., ~20%), which underpins our long-term valuation framework. Even with the benefit of not having physical locations, we expect that competition, regulation, and general social pressures will keep overall returns consistent with what we currently see in the market," they concluded.