Block's Growth Fueled by Cash App Expansion, Square Ecosystem Focus, Says Analyst

Mizuho analyst Dan Dolev maintained Block Inc SQ with a Buy and raised the price target from $99 to $106.

As per Dolev, reinvigorated management focus on the Cash App and Square ecosystems could drive a meaningful upside to the 2024 guide. 

The analyst flagged four key levers:

1. Converting ~1million more Cash Card users to direct deposit — where spend is 6x higher — could add +3% to GP growth.
2. Expanding Cash App's universe to higher income cohorts (+1%).
3. Broadening Cash App Borrow product reach (+1%).
4. Regaining Square POS momentum in U.S. restaurant industry (+1%).

Also Read: Block Analyst Bullish on Strategic Shift and Profit Focus

Dolev’s blue-sky scenario suggested gross profit growth could reach >20% in 2024 (vs. +15% guide and +16% consensus).

Dolev’s new gross profit estimates of $8.85 billion and $10.15 billion in 2024 and 2025 are up from $8.67 billion and $9.86 billion previously and are above consensus. 

Dolev added that Square growth could improve, driven by Jack Dorsey’s greater involvement, sales verticalization processes, more excellent product bundling that can drive more software revenue, and easier same-store sales growth comps.

Morgan Stanley analyst James Faucette recently downgraded Block to Underweight from Equal-weight and moved his price target to $60 from $62. 

Faucette noted the risk to the long-term Cash App growth assumptions based on his demographic analysis of the U.S. 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, based on his identified medium-term headwinds, Faucette needed to be more convinced about Block’s ability to reaccelerate Square Seller’s growth sustainably. 

Faucette highlighted that most investors significantly disagreed with his downgrade, with more optimistic investor outlooks focused on the potential for near-term upward EBITDA revisions and the impact of more focused Seller revisions and the push for increased direct deposits. 

Block can continue to deliver on cost savings and profitability beats with higher-quality earnings numbers, he noted. Cash App should get credit for new banking services, which can support direct deposit activity and inflows, and credit cards and other lending products would not be as dilutive as Faucette implied, as Cash App would keep loss rates low and keep loans off the balance sheet by selling to partners.

Block gained 18% in the last 12 months. Investors can gain exposure to the stock via ARK Fintech Innovation ETF ARKF and ARK Next Generation Internet ETF ARKW.

SQ Price Action: Block shares traded lower by 2.43% at $78.04 at publication Wednesday.

Photo: Sergei Elagin via Shutterstock