Despite the different business endeavors of Block Inc. SQ, +11.69%, its recent emphasis on profitability has drawn comparisons to Meta’s META, +0.29% significant shift towards efficiency this year. This strategic move by Meta resulted in significant gains for its stock, and now Block seems to be following suit.
On Thursday afternoon, Block presented a comprehensive plan to enhance efficiency, which has been long-awaited. In order to substantiate the plan, Block provided detailed measures and financial targets. This includes a reduction and cap on headcount, a reduction in overhead costs, and improvements to the company’s cost structure.
In a notable move, Block’s Chief Executive Jack Dorsey has taken charge of the Square seller business. This action is expected to foster collaboration, break down existing silos within SQ’s ecosystems, and lead to cost-cutting. Bernstein’s Harshita Rawat, who rates Block’s stock at outperform with a $60 target price, views this as a positive development.
The market has also responded enthusiastically to Block’s focus on profitability, with shares rising by 13% during Friday morning trading.
Monness, Crespi, Hardt & Co. Analysts Positive on Block’s Progress Towards Rule of 40 Profitability
Monness, Crespi, Hardt & Co. analyst Gus Gala expressed optimism about Block’s management setting a goal to attain “Rule of 40” status by 2026. This goal is based on expected mid-teens gross profit growth and a mid-20s margin of adjusted operating income. Gala also highlighted the company’s announcement of a $1 billion buyback program, which he referred to as the “cherry on top” of Thursday’s report.
Gala stated that despite a more subdued opportunity for estimate revisions in calendar 2024, he remains positive. He believes that events showcasing credible progress towards achieving Rule of 40 profitability, like the 3Q23 performance, will support a higher valuation for Block’s stock. As a result, Gala increased his price target on the stock to $75 from $70 and maintained a buy rating.
Wells Fargo Analyst Takes Measured View
Wells Fargo analyst Andrew Bauch praised Block for taking a “first-ever hard look at expenses.” However, he maintained a more cautious stance on the stock.
While acknowledging the introduced road map, Bauch is waiting for concrete evidence that the actions taken by the company can deliver sustainable scalability for the business. He also believes that these results have reduced significant downside risks in the near term. Consequently, Bauch has an equal-weight rating on the stock but increased his target price to $55 from $45 after Thursday’s update.
Conclusion
Analysts at Monness, Crespi, Hardt & Co. and Wells Fargo have provided their perspectives on Block’s recent developments. Despite differing levels of enthusiasm, both analysts recognize the importance of Block’s progress towards achieving Rule of 40 profitability. Investors will be closely watching as the company moves forward on its path towards increased value.