Block (ticker: SQ) shares have seen a significant surge in premarket trading on Friday, following the company’s announcement of targets for more efficient growth. This increase in stock value is reminiscent of the recent jump seen in rival company PayPal, as investors become more optimistic about payment stocks.
Strong Earnings and Guidance Exceed Expectations
Shares of Block have soared by 17% to reach $51.35, driven by impressive earnings and guidance that surpassed expectations. Meanwhile, PayPal (PYPL) observed a 0.4% increase and had experienced a more than 6% rise the previous day due to its own positive earnings report.
Resurgence of Payment Stocks
After suffering substantial losses over the past two years, payment stocks like Block and PayPal may finally be making a comeback. Wall Street analysts reacted positively to Block’s commitment to achieving the ‘rule of 40’ by 2026. The ‘rule of 40’ refers to the combined revenue growth rate and profit margin exceeding 40%.
Analyst’s Perspective
In a research note, Monness Crespi Hardt analyst Gus Gala stated, “We contend events highlighting credible progress against rule of 40 profitability (like the third quarter 2023 print) will underpin multiple rerating.” Reflecting his optimism, Gala increased his price target for Block stock from $70 to $75 and maintained a Buy rating.
It is clear that Block’s strategic focus on efficient growth has instilled confidence in both investors and analysts alike. As the company continues to make progress toward its goals, there is considerable potential for a revaluation of its stock.
BLOCK AND PAYPAL COMMIT TO STOCK BUYBACKS
Block and PayPal have both made commitments to repurchase shares, with Block announcing a repurchase of $1 billion worth of shares and PayPal committing to repurchasing $5 billion worth of shares this year. This move is seen as a turning point in messaging and strategy for Block, with management focusing on growth, headcount, and profitability.
Positive Outlook for Block
Analyst Tien-tsin Huang from J.P Morgan has expressed optimism about Block’s future, stating that the company’s management is taking decisive steps to unlock value. Huang maintains an Overweight rating on Block stock, with a target price of $75.
Concerns Remain for Bearish Analysts
However, some analysts are more cautious, expressing concerns about slowing gross profit growth. Block’s third-quarter gross profit increased by 21% compared to the same period last year, but this is a slower growth rate than the previous quarter’s 27% increase.
Jeff Cantwell, an analyst from Seaport Research, believes that gross profit growth needs to reaccelerate in order to support a bullish outlook for Block. Since this does not appear imminent, Cantwell maintains a Neutral rating on the stock.
In conclusion, Block’s commitment to stock buybacks has drawn attention from analysts and investors alike. While some are optimistic about the company’s future prospects, others remain cautious due to concerns about slowing gross profit growth.
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