Block: Earnings Expectations Are Low – But the Stock Remains a ‘Buy,’ Says RBC

Since the turn of the year, Block (SQ) shares have retreated to the tune of 57%. As such, with the company soon scheduled to report 2Q22’s financials (August 4), RBC analyst Daniel Perlin believes the toned-down valuation means the “expectation hurdle” going into the print is “relatively low.”

That said, like in the prior quarter, the current macro environment remains unpredictable and while Perlin says it is hard not to want to “be more constructive” on the digital payments leader, the prospect of a recession, which would affect Block’s end markets and consumers, looms large.

With this in mind, based on the market’s “re-rating of high-growth stocks and a more cautious macro view” into 2H/22, Perlin has lowered the price target for the stock from $147 to $91. Nevertheless, the figure, which could still generate returns of 31% in the year ahead, supports Perlin’s Outperform (i.e. Buy) rating (To watch Perlin’s track record, click here)

Perlin’s expectations for the quarter are mainly below the Street’s estimates. The analyst is calling for net revenues of $1.74 billion (Street is at $1.79 billion), gross profit of $1.48 billion (Street has $1.49 billion) and adj. EBITDA of $135 million (Street calling for $148 million).

What areas of Block should investors be keeping an eye on?

As reflected in GPV (gross payment volume), all eyes will be on the near-term demand for SMB (small and medium business) sellers, and here also, Perlin thinks the Street’s forecast could “prove aggressive.” Perlin’s model calls for a 16% year-over-year increase to $45 billion, below the consensus estimate of $49 billion.

Cash App gross profit will also be under the microscope. Here Perlin thinks that somewhat on account of a “downdraft” in Bitcoin gross profit, his own estimates could “prove too aggressive.” The Street has this figure at $705 million, this time below RBC’s current $727 million forecast.

Elsewhere, investors should also focus on the “continued integration and cross-sell of Afterpay in both Cash App and Square ecosystems.”

So, that’s RBC’s take, what does the rest of the Street think lies in store for Block? Good things actually. Based on 28 Buys, 7 Holds and 1 Sell, the stock qualifies with a Strong Buy consensus rating. The forecast calls for one-year gains of 85%, considering the average price target clocks in at $128.34. (See Block stock forecast on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.