Shares of Block are in trouble, according to Evercore ISI. The firm on Wednesday downgraded shares of the payment company to underperform from outperform and slashed its price target on the company to $55 per share from $120. That’s nearly 21% below Tuesday’s close. “We are downgrading SQ to Underperform from Outperform given potentially growing headwinds to its Seller and BNPL (Afterpay) businesses driven by increasing competition, tightening credit and an expected slowdown in macro-economic growth, negatively pressuring our 2023 gross profit and EBITDA estimates,” wrote analyst David Togut in a Wednesday note. “While SQ continues to make significant strides in driving strong growth within Cash App through higher engagement and monetization, we expect weakness within Seller and BNPL to pressure total company earnings given a lower margin profile for Cash App,” he added. Increased competition Competition in the payments space is heating up and could be a headwind for Block. Since 2019, the company’s seller volume and revenue growth has at times lagged competitor Clover’s. In addition, given expectations for a U.S. economic slowdown, Evercore ISI now sees Block’s profit growth rate continuing to decline from the second half of this year through 2024. The company’s buy now, pay later division saw growth slow sharply in the first half of 2022 due to increased competition, reduced consumer spend and more cautious credit disbursement from Block. “While cross-selling Afterpay within Seller and Cash App should help, these headwinds should sustain through 2023E,” Togut said. “2022E-2024E, we forecast Afterpay’s gross profit growth rate will average 13%, down from 83% and 72% in 2020 and 2021, respectively.” Cash App is a different story, as Evercore ISI sees it growing gross profit in the coming quarters by utilizing new products and cross-selling. Still, that won’t offset losses from other parts of the company. “We expect Cash App (ex BNPL) gross profit to grow 25%, 23% and 21%, respectively,” said Togut. “That said, Cash App’s 2021 EBITDA margin of 12% sits well below Seller’s EBITDA margin of 35%, implying limited earnings contribution despite strong revenue growth.” —CNBC’s Michael Bloom contributed reporting.
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