Stock Analysis & Ideas

Could the Recovery in Block Continue?

Block (NYSE:SQ) stock lost a substantial portion of its value amid the recent selloff in high-priced growth stocks due to macro concerns, including high inflation and rising interest rates. For instance, Block (formerly known as Square) lost about 40% of its value in the past six months. 

Nevertheless, it has recouped a portion of its losses on stellar Q4 results and is up about 27.6% over the past month. Notably, Block benefitted from the robust performances across its Cash App and Square ecosystems. 

Now What?

Looking ahead, momentum in the Cash App segment will likely continue. Customer acquisitions and strength in retention could continue to support growth. 

Breaking down the revenue drivers, Mizuho Securities analyst Dan Dolev expects Cash App (excluding the Afterpay acquisition) to exceed investors’ expectations in 2022. Dolev stated, “Our granular build suggests that Cash App ex-Afterpay could grow 30-35% in 2022.”

The analyst considers his estimates conservative as Cash App’s entry into the teenager markets would contribute to its growth. Dolev raised his Cash App gross profit estimates through 2024 and maintained a Buy recommendation on the stock. 

Along with Dolev, RBC Capital analyst Daniel Perlin is also upbeat about Block’s prospects. Perlin sees Bitcoin as a revenue driver for Cash App and stated, “Crypto/Bitcoin remains a small and volatile contributor today, but could develop into a more cohesive strategy and financial contributor longer-term.”

Notably, Block generates a fee from Bitcoin sales to its customers. In Q4, Bitcoin revenue came in at $1.96 billion. 

Perlin expects Block to benefit from the continued adoption of its consumer products and integrated solutions. Further, the analyst projects Block’s revenue to grow at a CAGR of 30% over the next three years. 

Perlin has a price target of $147 (8.2% upside potential) on SQ stock and expects it to “emerge as a structural beneficiary post the currently challenged macro environment.”

Bottom Line

The strength in its Cash App and opportunities within Bitcoin provides a solid growth platform. However, macro headwinds could remain a drag in the near term. 

Nevertheless, Wall Street is Bullish about SQ stock. It has received 30 Buy and four Hold recommendations for a Strong Buy consensus rating. Further, the average Block price target of $185.39 implies 36.4% upside potential to current levels.

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