Corporate bond research firm Gimme Credit initiated coverage of Block (SQ) with an Outperform rating in a note Friday, citing strong financial performance and improving creditworthiness.
Following a positive first quarter, Block raised its 2024 guidance. While competition and regulations pose risks, Gimme Credit expects Block's renewed focus on profitability to translate into significant EBITDA and free cash flow growth.
Block operates through Square (NYSE:SQ) (business solutions) and Cash App (consumer finance), generating revenue from transaction fees, loans, subscriptions, and BNPL offerings. The BNPL space, entered through the Afterpay acquisition, adds to Block's competitiveness against established players like PayPal and Visa.
Despite regulatory investigations and a crowded market, Gimme Credit notes that Block delivered 19% year-over-year revenue growth in Q1, with Cash App leading the charge at 23%. Adjusted EBITDA surged to $633 million, and Block is on track to reach its "Rule of 40" profitability target by 2026.
With a strong cash position, positive free cash flow, and leverage declining to 2.4x, Block's credit profile is improving, according to the corporate bond research firm. Gimme Credit expects leverage to fall below 2x by year-end.
"Growing earnings, falling leverage, strong free cash flow and a net cash position all bode well for Block's credit. The 6.5% senior notes due 2032 yield 6.1%," wrote Gimme Credit. "That compares to a 5% for similarly dated bonds issued by competitor PayPal, which has a bigger market cap, higher EBITDA margin and investment grade ratings."
They concluded: "We believe Block’s yields should fall as it closes the gap over the next couple of years. We initiate coverage at 'outperform.'"