On Monday, Goldman Sachs initiated coverage on Block Inc. (NYSE:SQ), the financial technology firm, with a Buy rating and set a price target of $80.00. The firm sees Block as a prominent player in the small and medium-sized business (SMB) payments and consumer fintech sectors, highlighting its strong track record of product innovation.
The company's performance, excluding the pandemic years, shows that its shares have been relatively stable for approximately six years. This stability is noted despite significant compound annual growth rates (CAGR) in key financial metrics such as gross profit, Seller Gross Payment Volume (GPV), and Cash App active users, which have seen increases of 44%, 22%, and 41% respectively.
Goldman Sachs points out that Block Inc. has also started to grow its free cash flow and establish valuation support. The company has implemented a Rule of 40 framework, which is a balance between growth and profitability, and has transitioned to using Generally Accepted Accounting Principles (GAAP) for its targets, including stock-based compensation (SBC). Moreover, Block is anticipated to maintain mid-teen growth in gross profit.
Based on Goldman Sachs' estimates, Block's shares are currently trading at around 18 times the firm's projected adjusted earnings per share for 2025. This valuation is considered attractive by the analyst, given the company's prospects for continued double-digit top-line growth and potential "moon shot" opportunities that could further accelerate its growth trajectory.
In other recent news, Block Inc. has been in the spotlight due to several significant developments. The company successfully upsized its private placement offering to $2 billion of 6.50% senior notes due 2032, surpassing the initial plan of $1.5 billion. The proceeds from this offering are intended for various corporate purposes, including potential debt repayment and strategic transactions.
Block's standing in the investor community has also been influenced by the views of financial analysts. TD Cowen has addressed the possible impact of a new rule from the Consumer Financial Protection Bureau on Block, suggesting that the costs associated with compliance would likely be minimal. Meanwhile, William Blair maintained a Market Perform rating on Block, acknowledging the company's strategic growth focus but expressing caution due to its high valuation and potential risks.
On the trading front, Cathie Wood's ARK ETF made a notable adjustment to its portfolio, reducing its holdings in Block by selling 110,334 shares. This move indicates a shift in ARK's investment stance on the financial services and digital payments firm.
InvestingPro Insights
Following Goldman Sachs' optimistic outlook on Block Inc. (NYSE:SQ), current data from InvestingPro aligns with some of the positive sentiments expressed. Block Inc. is indeed a prominent player in the Financial Services industry, as noted by Goldman Sachs, and this is supported by its substantial market capitalization of $39.07 billion. The company's revenue growth is also notable, with a 23.28% increase over the last twelve months as of Q1 2024, underscoring its strong position in the market.
An interesting aspect to consider from InvestingPro Tips is that analysts have recently revised their earnings upwards for the upcoming period, indicating potential confidence in the company's financial prospects. Additionally, the company is expected to be profitable this year, which could further justify the Buy rating assigned by Goldman Sachs. With a PEG ratio of 0.4, the company is trading at a low price to earnings growth ratio relative to near-term earnings growth, suggesting that the stock could be undervalued based on its growth outlook.
For investors seeking more in-depth analysis and additional tips, InvestingPro provides a comprehensive set of insights. There are 11 additional InvestingPro Tips available, which can be accessed through the InvestingPro platform. For those interested in a deeper dive into Block Inc.'s financials and future prospects, use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
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