On Thursday, Morgan Stanley adjusted its stance on Block Inc. (NYSE:SQ), formerly known as Square, downgrading the stock from Equalweight to Underweight and reducing the price target to $60 from $62. The investment firm's decision reflects concerns about the sustainability of the company's Ebitda growth and its implications for future revenue expansion.
The analyst from Morgan Stanley expressed that the downgrade is based on a valuation that is slightly below Block's peers when adjusted for growth, particularly in the Seller segment of the business. The firm applied a 12x Seller EV/Ebitda multiple, which is marginally lower than competitors due to the belief that Block's high rates of Ebitda growth may not be maintained in the medium term, potentially leading to limited top-line growth.
For Block's Cash App division, Morgan Stanley has set a 2.5x EV/Gross Profit multiple, aligning it with consumer finance peers such as Affirm Holdings (NASDAQ:AFRM) Inc. and Synchrony Financial (NYSE:SYF), and slightly below that of Capital One Financial Corp (NYSE:COF). The comparison of Cash App's gross profit growth was made to the revenue growth of traditional consumer finance companies to justify this valuation.
The investment firm also considered the long-term potential of Cash App to evolve into a bank similar to Capital One, targeting the younger Gen Z and millennial demographics. 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 optimal scenario, where Cash App mirrors the success of Capital One for the younger generation, seems to be already factored into the current valuation assumptions for the app.
Block Inc.'s stock adjustment by Morgan Stanley suggests a cautious outlook on the company's ability to sustain its rapid growth and compete effectively in the consumer finance market. The new price target of $60 reflects these revised expectations.
InvestingPro Insights
Analyzing the recent performance of Block Inc. (NYSE:SQ) through the lens of InvestingPro 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 5000, indicating that investors may expect significant future growth. The adjusted P/E ratio for the last twelve months as of Q4 2023 stands at -1149.1, reflecting investor sentiment about the company's earnings potential.
Block Inc. has reported a revenue growth of 25.01% for the last twelve months as of Q4 2023, which is a strong indicator of the company's ability to expand its business. Moreover, the company's gross profit margin during the same period was 34.58%, demonstrating its efficiency in controlling the costs associated with its revenue.
InvestingPro Tips suggest that Block Inc. is expected to see net income growth this year, and it remains a prominent player in the Financial Services industry. Its stock price movements have been quite volatile, with a significant price uptick over the last six months, resulting in a 90.1% return. This volatility and performance could be of interest to investors looking for growth opportunities in the sector.
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