Overview#

Rothschild has recently upgraded Block's stock rating to Neutral following a significant decline in its share price. However, the firm has expressed concerns about rising loan losses that could negatively impact the company's earnings.

Concerns About Performance#

There are worries regarding how Block manages its balance sheet and the performance of its Square payments business. Rothschild noted that these issues have already affected the stock, which has dropped approximately 70% since the firm first initiated coverage. Currently, Block's shares are trading at about 13 times its expected earnings for 2027, which aligns with similar financial technology companies, known as neobanks.

Shift in Revenue Sources#

Analysts at Rothschild believe that the market is beginning to view Block more as a neobank, especially as growth is increasingly driven by its Cash App service. They estimate that around 70% of future revenue growth will come from Cash App, particularly through its Borrow product, which offers unsecured loans. The broader availability of Borrow and increased usage among current customers are expected to support this growth.

Earnings Estimates and Risks#

Rothschild has raised its earnings estimates for Block by 28% to 34%, attributing this to stronger lending growth and reduced costs, including efficiencies gained from artificial intelligence. They anticipate that operating margins will rise to about 29% by fiscal 2028. However, the firm cautioned that consensus estimates might not fully capture the credit risks associated with the company's lending practices, predicting that loan losses could approach management's 3% tolerance level as lending expands.

Square's Ongoing Challenges#

The brokerage also highlighted ongoing challenges for Block's Square division, noting that its growth in the U.S. is lagging behind competitors like Shopify. Additionally, recent job cuts may hinder the company's recovery efforts. Rothschild has increased its price target for Block from $45 to $55, suggesting an approximate 8% potential upside, but indicated that the stock's recent re-evaluation leaves limited short-term growth potential.