Stocks

Block Reports Mixed Q3, Analysts Consider Preliminary 2025 Outlook As Aggressive

Published November 8, 2024

Shares of Block Inc (NYSE: SQ) experienced a decline in early trading on Friday following the release of the company's mixed third-quarter results. These results came in the midst of an eventful earnings season.

Key Analyst Opinions

Several analysts shared their insights regarding Block's performance:

Needham analyst Mayank Tandon maintained a Buy rating and revised the price target upward from $80 to $90.
JPMorgan analyst Tien-tsin Huang reiterated an Overweight rating, keeping a price target of $90.
Stephens analyst Charles Nabhan also upheld an Overweight rating, while maintaining a price target of $90.
Oppenheimer analyst Rayna Kumar maintained a Perform rating on the stock.

Performance Highlights

Needham pointed out that Block's gross payment volume (GPV) reached $62.5 billion, reflecting a 4% year-on-year increase, but underperformed against the consensus estimate of $64.33 billion. Additionally, Block's gross profit of $2.25 billion surpassed the consensus of $2.24 billion. Tandon noted that while GPV weakness impacted transaction revenues, "healthy margins and operating leverage fueled better profitability."

The company has raised its full-year guidance due to better-than-expected third-quarter results. Nevertheless, the outlook for the fourth quarter appeared lighter than analysts expected in terms of gross profit and EBITDA. Tandon suggests that the cautious fourth-quarter guidance reflects ongoing pressure on Seller GPV growth and unanticipated increases in sales and marketing investments.

Future Outlook

From JPMorgan's perspective, Block's quarterly results were deemed solid, but the downward adjustment in fourth-quarter guidance was a negative surprise. Huang highlighted that management's preliminary 2025 outlook forecasts at least 15% growth in gross profit, which relies on an acceleration in Square GPV growth. This aspect is crucial for investors, especially considering Block's past underperformance relative to competitors and the market.

According to Huang, the guidance sets a higher performance expectation for next year. As growth in gross profit is anticipated to decelerate through 2024, Block will face the challenge of achieving a higher growth rate beyond a +14% exit rate for FY24, putting various strategic initiatives under scrutiny for potential upside.

Expense Management and Growth Areas

According to Stephens, Block's third-quarter success was aided by effective cost control. Gross profit from Cash App grew by 21% year-on-year, while Square's gross profit increased by 16%. However, GPV growth saw a decline to 7.6% year-on-year from 8% in the preceding quarter.

Block raised its full-year adjusted operating income by $120 million, reflecting the stronger third-quarter performance. Nabhan highlighted that this outlook translates to 36% on a rule of 40 basis, a slight improvement over the previous 35% forecast.

Market Challenges

Oppenheimer mentioned that while Block's adjusted EBITDA surged by 69% to $807 million—exceeding the consensus estimate of $707 million—total GPV only rose by 2%, falling short of the expected 5% increase. Notably, Cash App's GPV declined by 40%, contrary to analysts' forecasts of a 9% drop, whereas Square's GPV growth of 8% met expectations.

Investor concerns about the company's slowing revenue growth became evident during the results announcement. Kumar expressed that while Block appears well-positioned to continue capturing market share, its growth potential might be constrained due to its substantial reliance on discretionary consumer spending, small businesses, and non-affluent demographics.

Stock Performance

As of Friday's publication, Block's shares have fallen by 5.52%, reaching $71.08.