Block Stock Is Beaten-Up, but Some on Wall Street Still Like It

Block has ample potential to expand its margins, according to J.P. Morgan.


Courtesy Block

Block has had a challenging year, with shares off by more than 60% but analysts at



J.P. Morgan

say the market is failing to recognize the payment’s company’s tremendous earnings power.

The bank’s claim that the market “underappreciates” the business came after a recent meeting with Block’s chief financial officer and investor-relations team left the analysts confident that Block could expand its margins by double digits by 2024. They reaffirmed their Overweight rating on the stock, as well as their target of $115 for the price.



Block

stock (ticker:



SQ

) was down 1% at $55.35 on Friday amid declines in the broader market. The



S&P 500

was 2.3% lower.

Although big-picture concerns such as high interest rates and inflation are weighing on the prices of growth stocks and limiting consumer spending, J.P. Morgan sees positive elements in Square’s recent performance. Trends in August were consistent with those in recent months.

For Square, Block’s point of sale platform, August’s gross profit growth was in line with July and the prior quarter. Spending on Block’s mobile payments platform, CashApp, meanwhile, is doing slightly better than in the second quarter, according to Tien-tsin Huang, a J.P. Morgan analyst.

But while consistency is an encouraging sign, investors often need to see growth to get truly excited. Of course, growth and expansion cost money but Huang said he is encouraged by the margins Block’s businesses can achieve by 2024 as it invests in growth and increases its market share. The Cash App’s margins could expand to a range of 18% to 22% from 12% in 2021, according to Huang. That would put Cash App on par with other payments platforms like



Western Union

(WU) and



PayPal

(PYPL).

Margins at Square, meanwhile, could expand to 40% to 47% by 2024, up from the current 34%, Huang wrote.

Huang’s target of $115 for the stock price represents a multiple of seven times the per-share gross profit expected for 2024. Other growth-oriented fintechs that are able to increase gross profits in a range of 20% to 30% are trading at multiples in the mid-single digits to low-double digits, he said.

Wall Street is generally optimistic on the stock, although enthusiasm has faded as Block’s share price has tumbled this year. Roughly two thirds of analysts surveyed by FactSet rate shares the equivalent of a Buy. The average price target stands at $110.19.

Still, Block faced two downgrades this week. Mizuho Securities lowered its rating for Block to Neutral from Buy and cut its price target to $57 from $125. And Evercore ISI double downgraded the stock from Underperform from Outperform and slashed its price target to $55 from $120, citing more competition and a challenging macroeconomic backdrop.

Write to Carleton English at carleton.english@dowjones.com

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