Square-parent Block's margin commentary gets mixed reviews

Square-parent Block's margin commentary gets mixed reviews

At its recent investor day, Square-parent Block Inc. didn't offer long-term margin guidance, but analysts found a lot of things to like in the company's latest discussion of its business.

SQ gave a confident, thoughtful and coherent message with a strategic focus, according to James Friedman, a financial services and digital payments company that was founded in 2009 by Jack Dorsey and Jim McKelvey.

Like many analysts he keyed in on Block's SQ, margin commentary and what it implied about the potential for margin expansion.

Block disclosed a 69% structural margin for its Square business, which was previously known as a seller, and a 37% margin for its Cash App business. Chief Financial Officer Amrita Ahuja said during the presentation that the structural margins we shared today represent Square and Cash App margins net of variable costs, while likening them to an incremental margin for our business. We think the Square segment looked good, Cash App margins were softer than we thought, and structural breakdown suggests margins could go higher, Friedman wrote. The outlook didn't commit immediate margin expansion near term, and concrete financial guidance was limited. He rates Block's stock at positive with a $160 price target.

Jefferies analyst Trevor Williams looked at Block's disclosures on earnings before interest, taxes, depreciation and amortization Ebitda margins, but the company pointed to a 34% margin for the Square business and a 12% margin for Cash App business during the current fiscal year.

He wrote that for Cash App futures, he believes future margin expansion will come from ongoing leverage on marketing spend, while keeping a buy rating on the stock, but he reduced his price target to $120 from $140. With variable costs largely unchanged over the last four years, leverage on fixed expenses will be the primary unlock for higher margins. Even though she doubtful that Block's management would share such numbers, Bernstein's Harshita Rawat said that the lack of long-term margin targets was the elephant in the room.

She wrote that disclosures can help investors estimate the long-term profitability outlook for Square Cash App ecosystems, which we believe can comfortably achieve 40% and 30% adjusted Ebitda margins as a gross profit in the long-term, up from 34% and 12% today, while maintaining her outperform rating, but slashed her Block price target to $120 from $200.

Rawat was enthused by Block's talk about the growing links between its Square, Cash App and Afterpay businesses, as the company aims to build Afterpay-powered commerce on the Cash App.

The Cash App will be an operating system that focuses on more than just money.

Rawat continued to work on commerce discovery. SQ is serious about providing financial banking services to users and expanding its user base to affluent older demographics. Square's banking ambitions stood out to Morgan Stanley's James Faucette, though he took a more cautious view on some aspects of the company's strategy.

Faucette rates Block shares at the same weight and reduced his price target to $110 from $118.

The shares of Block are up 4.2% in Thursday morning trading after falling 3.2% in Wednesday s session.

They've fallen 47% this year, as the S&P 500 SPX has lost 18%.