Square-parent Block Inc. didn’t offer long-term margin guidance at its recent investor day, but analysts largely found things to like in the company’s latest discussion of its business.
“SQ delivered a confident, thoughtful and coherent message with a strategic focus,” wrote Susquehanna analyst James Friedman about the financial services and digital payments company originally founded in 2009 by Jack Dorsey and Jim McKelvey.
Like many analysts, he keyed in on Block’s
margin commentary and what it implied about the potential for margin expansion.
Block disclosed a 69% “structural margin” for its Square business, formerly known as seller, and a 37% margin for its Cash App business. “The structural margins that we shared today represent Square and Cash App margins net of variable costs,” Chief Financial Officer Amrita Ahuja said during the presentation, while likening them to “an incremental margin for our business.”
“We think the Square segment looked good, Cash App margins were softer than we had thought, and structural breakdown suggests margins could go higher,” Friedman wrote. “But to be clear, the outlook didn’t commit immediate margin expansion near term, and concrete financial guidance was limited.”
He rates Block’s stock at positive with a $160 price target.
Jefferies analyst Trevor Williams looked to unpack Block’s disclosures on earnings before interest, taxes, depreciation, and amortization (Ebitda) margins, as the company pointed to a 34% such margin for the Square business and a 12% margin for the Cash App business during the latest fiscal year.
“For Cash App, we believe future margin expansion will come from ongoing leverage on marketing spend,” he wrote, while keeping a buy rating on the stock but cutting his price target to $120 from $140. “For Square, with variable costs largely consistent over the last four years, leverage on fixed expenses will be the primary unlock for higher margins.”
Bernstein’s Harshita Rawat called the lack of long-term margin targets “the elephant in the room,” noting that investors seemed to be hoping for such a discussion, even though she was doubtful that Block’s management would share such numbers.
“That said, the disclosures can help investors estimate a long-term profitability outlook for Square & Cash App ecosystems, which we believe can comfortably achieve 40%+ and 30%+ adjusted Ebitda margins (as a % gross profit) in the long-term, up from 34% and 12% today,” she wrote, while maintaining her outperform rating but slashing her Block price target to $120 from $200.
Rawat was enthused by Block’s talk of the growing links between its Square, Cash App, and Afterpay businesses, as the company aims to build “Afterpay-powered commerce on the Cash App,” she wrote.
“The new Cash App will be an ‘operating system’ focusing on more than just money
& also on commerce/discovery,” Rawat continued. “SQ is serious about providing financial/banking services to users & also expanding its user base to affluent & older demographics.”
Square’s banking ambitions stood out to Morgan Stanley’s James Faucette as well, though he took a more cautious view on some aspects of the company’s strategy.
“We understand that management is taking a measured approach to expanding lending services (understandable in the current environment) and that Afterpay was an important step in integrating more credit services and introducing a meaningful new customer acquisition channel, but we think discussion around the Buy Now Pay Later feature seemed limited to interest-free, short-duration loans, which we don’t think is sufficient to meet the needs of Gen Z/Y customer base in the medium to long-term,” he wrote.
Faucette rates Block shares at equal weight and reduced his price target to $110 from $118.
Shares of Block are up 4.2% in Thursday morning trading after declining 3.2% in Wednesday’s session.
They’ve fallen 47% so far this year as the S&P 500
has lost 18%.