Block’s second-quarter adjusted earnings and sales have exceeded analysts’ expectations, and the company has raised its outlook for operating income for the full year. However, Wall Street is still cautious about the numbers, causing the stock to decline by 13% to $64.26.
Full-Year Expectations Remain Flat for Block
While the quarterly results were robust, analysts suggest that Block’s full-year adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) indicate a flat second half compared to the first half. Raymond James analyst John Davis noted a 15% year-over-year growth in seller gross profit for July, indicating a potential slowdown in the second half.
Davis rates Block at Market Perform with no target price. He predicts that the EBITDA margin will only see a 40 basis points increase year over year in the second half, which is significantly lower than the 6 percentage points improvement in the first half.
Concerns Surround Margins for PayPal
Similar concerns about margins have affected PayPal’s stock, which also experienced a decline of 1.1% on Friday following sinking shares on Thursday.
Analyst’s Perspective
Jefferies analyst Trevor Williams, who rates Block at Buy with a $90 price target, commented that the quarter lacked the anticipated “oomph.”
Despite these concerns, Block remains optimistic about its future performance, supported by its strong quarterly results. However, it is important to consider potential challenges in the macro backdrop affecting smaller-sized merchants and Cash App inflows, as well as their impact on the company’s valuation.
Limited Upside to Cash App, but Encouraging Outlook for Fourth Quarter
Analysts have expressed mixed sentiments about the recent performance of Cash App, with expectations falling short of investor optimism in the near-term. However, there is a glimmer of hope as the company anticipates reaccelerating growth in the fourth quarter.
Slower Hiring and More Efficient Marketing
One industry expert, Williams, believes that the higher adjusted Ebitda forecast is a result of a slower pace of hiring and more efficient marketing strategies. Interestingly, despite a 15% year-on-year increase in monthly active users, Williams noted a decline in customer acquisition costs during the second quarter.
Wall Street’s Negative Perception
Contrary to the negative sentiment on Wall Street, Jason Kupferberg from Bofa Global Research maintains a Buy rating for Block with a price objective of $86. He asserts that the market has been overly pessimistic, especially given the recent stock decline leading up to the report. Kupferberg emphasizes that while Square gross payment volume (GPV) growth slightly missed targets, it should not overshadow the potential for a positive second-half performance. Furthermore, Kupferberg asserts that Wall Street’s expectations for gross profit and adjusted Ebitda should be revised upward.
Undervalued and High-Quality Business Model
In conclusion, Kupferberg strongly believes that Square (SQ) is undervalued and has a high-quality business model. He argues that sentiment surrounding the company is unnecessarily negative.
