Block stock adds 3% on two analyst upgrades

Shares of Block Inc. (SQ) rose 3% in premarket trading Tuesday after BTIG and Wedbush analysts upgraded their ratings on the stock.

BTIG moved to Buy from Neutral on “company’s growth opportunities” alongside its focus on improving profitability.

Because of this, SQ presents “an attractive investment opportunity with the stock trading at ~17x FY24E EV/adjusted EBITDA,” analysts wrote.

BTIG said the core of its investment thesis is centered on Block’s strong presence in both consumer and merchant markets through its Cash App and Square platforms, as well as potential for both ecosystems “to become stronger as integrations are built between them.”

“At the same, we believe the Cash App and Square ecosystems are strong as individual units and have track records of providing value which we expect to continue in FY24+,” the team noted.

Also, the broker believes investors should not ignore Jack Dorsey’s comments in Block’s Q3 2023 shareholder letter, in which he said the company "finally has a line of sight to seeing more of Square within Cash App, and Vice Versa."

Moreover, analysts believe Cash App will maintain its status as a premier alternative to traditional banking, citing a promising path for growth, particularly through enhancing engagement with its current user base.

For instance, out of approximately 55 million monthly active users on Cash App, only about 2 million are utilizing its Borrow feature, indicating significant potential for expansion in this area, they wrote.

“We also are attracted to SQ's increased focus on costs and expect the company to reach its goal of mid-20s adjusted operating margin (including stock-based comp) by 2026, which we think will align with investors who are increasingly focused on GAAP profitability,” BTIG said.

On the other hand, Wedbush analysts raised the rating to Outperform, citing pricing leverage and financial discipline.

"We now have increased conviction in the company’s ability to post improving performance in its weak merchant segment," analysts said.

"In addition to management’s important (positive) decision last quarter to run the company with strict financial discipline and focus on GAAP earnings, we believe accelerating growth in the merchant segment is another important catalyst for the stock’s performance."

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