Block’s stock price has wobbled in the wake of the fintech company’s second-quarter earnings, but there remain multiple reasons to be upbeat, according to analysts.
Founded and led by former
(ticker: TWTR) CEO Jack Dorsey, shares in
) retreated after the group posted earnings late Thursday. The stock fell more than 7% in after-hours trading Thursday, and slipped 1.6% to $88.31 in midday Friday trading. The shares remain down about 45% so far this year.
Thursday night’s decline occurred despite what could be considered a good result. Earnings came in ahead of expectations and much firmer profit margins amid cost-cutting. Block posted second-quarter adjusted net income of 18 cents per share, above the 16 cents eyed by Wall Street, on $4.4 billion in revenue—above the $4.3 billion estimated by analysts.
“The big surprise was on adjusted EBITDA [earnings before interest, tax, depreciation and amortization] margins, which beat consensus by 270 basis points,” noted Susquehanna analyst James E. Friedman. “Management emphasized their focus on expense reduction efforts given the uncertain macro environment, reducing the full-year expense increase by $250 million.”
But the results also included a 34% fall in Bitcoin-linked revenue in its Cash App payments service, amid a crash in cryptocurrency prices and slowdown in trading. The mixed bag of results otherwise drew out different conclusions among different analysts.
Decelerating growth in Afterpay, with revenue up just 6% annually, was one drag, according to Lisa Ellis, an analyst at Moffett Nathanson. Afterpay is the company’s buy now, pay later unit, acquired in a 2021 an all-stock deal worth some $29 billion.
Management’s guidance that gross payment volume—which describes the total value of transactions on Block’s network—would grow 18% annually, and not 29% as previously guided, was another factor behind the initial stock price decline, said Mark Palmer, a BTIG analyst. The fact that the shares had rallied some 35% in the week leading up to earnings didn’t help, he added.
Nevertheless, there are still a lot of reasons to be optimistic about Block. Wall Street generally likes the stock, with 26 out of 38 analysts surveyed by FactSet giving the company a Buy rating, with an average target price of more than $116. With the stock trading around $91 on Friday, that implies a healthy upside.
“The acceleration of the growth of Block’s Cash App amidst the Covid-19 pandemic was a game-changer for the company as it dramatically expanded the app’s user base,” noted Palmer, who rates Block at Buy with a $175 target price.
“Block’s Seller ecosystem continues to generate healthy growth in the U.S., and we consider the company’s prospects for international growth to be promising,” Palmer added. Seller is Block’s arm that sells software and financial services to merchants.
And despite highlighting the weakness in Afterpay, Moffett Nathanson’s Ellis said the group “continue to see upside in Block, driven by the Seller recovery, Cash App monetization, and Afterpay acquisition synergies.”
Ellis rates Block at Outperform with a target price of $125. “We believe the Afterpay acquisition is strategically compelling for Block, accelerating the development of Block’s two-sided network, expanding the Cash App and Seller value propositions, and improving Block’s eComm and international footprints,” Ellis said.
At Bank of America, analysts led by Jason Kupferberg believe that the initial selldown in Block stock was unwarranted—and that, more generally, investors have too much of a negative outlook on the company.
Part of that could be due to its link with Bitcoin, according to Bank of America. After all, Block stock has shown to be somewhat correlated to big swings in the price of the largest cryptocurrency, like shares of other companies exposed to digital assets, like
“We continue to believe Block is undervalued,” said Kupferberg. “Its business model quality is high, and sentiment is too negative (i.e., too much Bitcoin negativity has rubbed off on Block).”
Write to Jack Denton at firstname.lastname@example.org
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