Block shares lack upside, says UBS — but this rival stock could be a winner

By Emily Bary

Block's stock gets an downgrade, while UBS turns bullish on Toast shares

Block Inc. shares have lagged the broader market this year, and a UBS analyst doubts there's much upside ahead for the payment-technology name.

Rayna Kumar of UBS downgraded Block's stock (SQ) to neutral from buy Wednesday, warning that growth could slow for the parent of Square and Cash App.

"While Block continues to make progress on profitability and repeatedly outperforms quarterly expectations on adjusted [earnings before interest, taxes, depreciation and amortization], investors remain more focused on Block's gross profit growth potential, we believe," Kumar said.

In that sense, she's worried about a potential slowdown in gross-profit growth due to moderating consumer spending. Kumar pointed to third-party data indicating that U.S. restaurant sales could decelerate by three percentage points in 2024, though Block's Square seller business could see slightly less deceleration.

Read: PayPal's stock could be near its ultimate bottom, analyst says

"With a lack of catalysts in sight, and re-acceleration of gross profit growth unlikely, we see limited upside potential," Kumar said.

Block shares fell 1.9% in Wednesday trading. The stock is off 8% so far this year, as the S&P 500 SPX has advanced 16%.

At the same time, she took a rosier view of restaurant-technology provider Toast Inc.'s stock (TOST).

"Toast's broadening suite of solutions, coupled with secular demand for modern, end-to-end restaurant POS [point-of-sale] technology should help drive outsized share gains of restaurants," Kumar wrote as she upgraded Toast shares to buy from neutral.

Kumar is upbeat about Toast's work to invest in more specialized verticals, such as hotel restaurants. "The solution has driven momentum upmarket with Toast winning several multi-location hotel deals," she said.

She boosted her price target to $30 from $25 on the stock, which fell 1.5% in Wednesday's session.

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-Emily Bary

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09-06-23 1659ET

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