In a recent report, UBS analysts expressed caution regarding payments company Block (ticker: SQ), downgrading its shares from Buy to Neutral. The analysts have also lowered their price target for the company to $65 from $102.
As of Wednesday, Block’s shares fell 1.2% to $58.05 during trading. The downgrade is mainly influenced by several factors.
Firstly, the UBS team expects a slowdown in Block’s gross profit growth, primarily due to the anticipated decrease in consumer discretionary spending in the second half of 2023 and heading into 2024. Additionally, they predict a moderation in monetization rates and a decline in monthly active user growth for Cash App, Block’s peer-to-peer payment service.
Although Block has demonstrated profitability and consistently exceeded quarterly estimates for adjusted earnings before interest, tax, depreciation, and amortization, investors have shifted their focus towards the potential for growth in gross profit. An example cited by the analysts is the 14% drop in shares on August 4, following better-than-expected second-quarter adjusted earnings alongside light full-year guidance.
Furthermore, the analysts do not foresee any upcoming factors that could trigger stock gains for Block.
“With a lack of catalysts in sight, and reacceleration of gross profit growth unlikely, we see limited upside potential,” stated the analysts. They also noted that the market has already factored in the possibility of profit growth slowing down next year. Block did not provide an immediate comment on the matter.
Despite UBS’s cautious outlook, a majority of analysts maintain a bullish stance on the stock. According to FactSet, 67% rate Block as Buy.