Block Profits Likely To Bear Brunt Of Consumer Spend And User Slowdown In Cash App, UBS Analyst Says

UBS analyst Rayna Kumar downgraded Block Inc SQ from Buy to Neutral and lowered the price target from $102 to $65.

In the second half of FY23E and FY24E, Block gross profit growth will likely slow given the softening of consumer discretionary spending, a slowdown in Cash App monthly active user growth, and moderation of Cash App monetization rates. 

While Block continues to make progress on profitability and repeatedly outperforms quarterly expectations on adjusted EBITDA, investors remain more focused on Block's gross profit growth potential, which was most evident following the 14% decline in shares after Block exceeded Street adjusted EBITDA by 30% in 2Q, while pointing to slowing gross profit growth for the second half of FY23E. 

With a lack of catalysts in sight and re-acceleration of gross profit growth unlikely, Kumar sees limited upside potential. 

That said, Block's shares trade near a 5-year low EV/Gross Profit multiple of 4x, suggesting the market essentially prices in the potential for decelerating gross profit growth next year.

Price Action: SQ shares traded lower by 0.90% at $58.21 on the last check Wednesday.