Block downgraded on concerns recent gains will ‘evaporate’


Shares of Block (NYSE:SQ) traded lower by nearly 4% Wednesday morning after the stock’s recommendation was reduced from Outperform to Market Perform at Oppenheimer. The downgrade followed recent gains in the stock, with shares up 43% in the last three months. Analysts are concerned this strength won’t last.

“We don’t believe we have seen the bottom in stocks and thus we could see the recent SQ rally evaporate,” wrote Oppenheimer analysts in a note to clients.

Prior to the recent surge, Oppenheimer’s price target on Block was only $64. It closed yesterday at $80.79.

“Our OP rating was predicated on SQ being able to protect adjusted EBITDA. We have learned investors really aren’t focused on adjusted EBITDA vs. gross profit given the high growth multiple. We’re ~14%/11% below consensus’ 23/24E GP. This stems from a spending slowdown in seller combined with less Cash App monthly active adds then consensus as well as less spend per active,” the analysts said.

They added, “Given SQ’s micro/small merchant (vs. peers) seller focus, volumes could swing more wildly in a downturn. In CashApp we think revenue growth is likely slower than anticipated given mid-/low-income consumer is not likely to have significant stimulus funds by 2H23/24. Also given monthly active level and US focus CashApp is fairly penetrated and thus account growth harder to come by, while engagement, we believe, is harder in a downturn given their customer base. EPS and valuation brings us to the sidelines.”

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