Block
stock was surging early on Friday after the company unveiled targets for more efficient growth late Thursday. The stock move is similar to the jump seen at rival
PayPal
as investors turn more positive on payment stocks.
Block
(ticker: SQ) shares were up 17% at $51.35 in premarket trading following earnings and guidance that came in ahead of expectations.
PayPal
(PYPL) was up 0.4%, having risen more than 6% the previous day on its own earnings beat.
Payment stocks might finally be coming back into fashion after Block and
PayPal
both lost more than three quarters of their value over the last two years. Block’s commitment to achieving the ‘rule of 40’ – a revenue growth rate and profit margin exceeding 40% when added together– by 2026 was welcomed by Wall Street analysts.
“We contend events highlighting credible progress against rule of 40 profitability (like the third quarter 2023 print) will underpin multiple rerating,” wrote Monness Crespi Hardt analyst Gus Gala in a research note.
Gala raised his target price on Block stock to $75 from $70 and kept a Buy rating on the stock.
Block also followed PayPal in committing to stock buybacks. Block said it would repurchase $1 billion worth of shares, helping offset some of the dilution of share-based compensation. PayPal has committed to repurchase $5 billion worth of shares this year.
“To us, this felt like a turning point in messaging and strategy, with [Block] management drawing hard lines around growth, head count (12k cap from 13k today) and profitability, checking many boxes on our wish list to unlock value,” wrote J.P Morgan analyst Tien-tsin Huang.
Huang reiterated an Overweight rating on Block stock with a target price of $75.
However, for more bearish analysts there are still questions about slowing gross profit growth. Block’s third-quarter gross profit was up 21% from the same period a year ago, slowing from 27% growth in the previous quarter.
“We’ve talked about gross profit growth needing to reaccelerate in order for us to see a true ‘bull case’ going forward for Block. This does not appear imminent, and therefore there’s no real change to our view- we’re staying Neutral,” wrote Seaport Research analyst Jeff Cantwell.
Write to Adam Clark at adam.clark@barrons.com
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