Morgan Stanley on Thursday adjusted its position in Block Inc. (NYSE:SQ), formerly known as Square, by lowering the stock’s rating from Equalweight to Underweight and reducing the price target from $62 to 60 $. The investment firm’s move reflects concerns about the sustainability of the company’s Ebitda growth and its implications for future revenue expansion.
The Morgan Stanley analyst said the downgrade was based on a slightly lower valuation than Block’s peers when adjusted for growth, particularly in the company’s seller segment. The company applied a 12x Seller EV/Ebitda multiple, which is slightly lower than its competitors due to the belief that Block’s high Ebitda growth rates may not be sustained in the medium term, which could lead to limited revenue growth.
For Block’s Cash App division, Morgan Stanley set an EV/Gross Profit multiple of 2.5x, aligning it with consumer finance industry peers such as Affirm assets (NASDAQ:) Inc. and Synchrony Financial (NYSE:), and slightly below that of Capital one Financial Corporation (NYSE:). Comparison of Cash App’s gross profit growth was done with revenue growth of traditional consumer finance companies to support this assessment.
The investment firm also looked at Cash App’s long-term potential to become a bank similar to Capital One, targeting younger Gen Z and millennials. Morgan Stanley’s valuation assumes that Cash App could achieve comparable average revenue per user (ARPU) and banking market share to Capital One for its target audience.
However, the analyst noted that the best-case scenario, in which Cash App reflects Capital One’s success with the younger generation, already appears to be factored into the app’s current valuation assumptions.
Morgan Stanley’s adjustment of Block Inc.’s shares suggests a cautious outlook on the company’s ability to maintain rapid growth and compete effectively in the consumer credit market. The new price target of $60 reflects these revised expectations.
InvestingPro Insights
Analyzing Block Inc. (NYSE:SQ)’s recent performance through the lens of InvestingPro’s data and insights can provide a deeper understanding of the company’s current financial health and market position. Block Inc. is trading with a market capitalization of approximately $49.27 billion and a very high price-to-earnings (P/E) ratio of 5,000, indicating that investors can expect significant future growth . The adjusted P/E ratio for the trailing twelve months to Q4 2023 stands at -1,149.1, reflecting investor sentiment about the company’s earnings potential.
Block Inc. reported revenue growth of 25.01% over the trailing twelve months in Q4 2023, which is a strong indicator of the company’s ability to grow its business. Furthermore, the company’s gross profit margin during the same period stood at 34.58%, demonstrating its effectiveness in controlling costs associated with its revenues.
InvestingPro tips suggest that Block Inc. is expected to see net profit growth this year and remains a leading player in the financial services industry. Its stock price movements have been quite volatile, with a significant price rise over the past six months, resulting in a return of 90.1%. This volatility and performance could be of interest to investors looking for growth opportunities in the sector.
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