Block Stock: Headed to $71?

Many tech stocks have soared in 2023. Just look at the tech-heavy Nasdaq Composite. It’s up 29% year to date. The Nasdaq 100 has risen an astounding 38%. Yet, somehow, payments company Block (SQ 5.24%), once a Wall Street darling, has suffered a much different fate. Its shares are down about 28% so far in 2023. Making the decline even more painful, it adds to the stock’s 61% decline in 2022.

But some analysts are convinced the sell-off has gone too far. One recent analyst to speak up about the stock’s strong potential from its current level is Bank of America analyst Jason Kupferberg. The growth stock’s pullback is “unjustified,” wrote Kupferberg in a note to analysts this week.

Why have shares been crushed?

A number of factors have driven the stock’s slide in 2022 and 2023. The primary reason is arguably a rotation out of growth stocks. Sure, most growth stocks have rebounded sharply in 2023, but very few have recovered to levels seen in 2021 or early 2022. So they’re still largely out of favor compared to investors’ interest several years ago. But there are some more company-specific factors plaguing Block, too.

Though the payments specialist, which was formerly called Square but renamed Block in 2021, has continued growing in 2023, its gross profit margin has narrowed significantly recently in recent quarters. Specifically, Block’s second-quarter gross profit margin was 27%, down from its recent quarterly high of 40% in the fourth quarter of 2022 and 29% in the year-ago quarter. Until Block’s gross profit margin stabilizes or even grows on a year-over-year basis, investors may worry about the company’s ability to grow its bottom line rapidly enough to live up to the stock’s $28 billion market capitalization.

Perhaps the most recent concern weighing on the stock was the disruption to its merchant services occurring last Thursday and Friday. Outages left many businesses stranded, only able to accept cash as payments.

The bull case

Kupferberg’s bull case is mainly built around the simple premise that the stock’s sharp decline since the end of July (about a 39% pullback as of this writing) is overdone, making shares too cheap relative to their fundamentals.

Addressing the platform outage, Kupferberg believes it will fade into the rearview mirror as a “one-off” incident. Further, the analyst predicts a heightened focus at the company on operating expense discipline will help address profitability. Indeed, Kupferberg anticipates Bock’s adjusted earnings before interest, taxes, and depreciation (EBITDA) for Q3 to be good enough for the company to raise its full-year outlook for the key profitability metric. This would build on Square’s momentum with this profitability metric in Q2. Block raised its outlook for full-year adjusted EBITDA in its second-quarter update, saying it now expects the figure to come in at about $1.50 billion for the year, up from a previous forecast of $1.36 billion.

While Kupferberg’s bull case is worth considering, investors may want to remain cautious. Even though the stock has been hammered, Block is still reporting quarterly losses. Its net loss in the second quarter of 2023 was $123 million. However, this notably improved from a loss of $208 million in the second quarter of 2022. Still, before investors invest in Block, they should be sure there’s a clear path to meaningful profits that live up to the stock’s high valuation. A $28 billion market capitalization is nothing to sneeze at, particularly when the payments specialist is still reporting losses.

Bank of America is an advertising partner of The Ascent, a Motley Fool company. Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America and Block. The Motley Fool has a disclosure policy.

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