Block isn't doing enough to win over Gen Z, this new bear warns

By Emily Bary

Morgan Stanley moves to a bearish stance on Block's stock, cautioning that the company could be too late to win Gen Z credit-card relationships

Block Inc. has won over more investors lately as the company puts a greater focus on profitability and discipline, but a Morgan Stanley analyst isn't sold on the stock's prospects.

James Faucette downgraded Block shares (SQ) to underweight from equal wright in a Thursday morning note to clients, writing that Wall Street appears too upbeat about the company's ability to grow both the Square and Cash App businesses.

"The market believes that Block can rapidly expand margins (primarily through cost cuts) while driving durable high-teens gross-profit growth in Cash App and reaccelerating Square Seller volume growth," he wrote.

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But in his view, traditional banks have already captured about half of Gen Z consumers who'd be eligible for credit cards, which puts a ceiling on the Cash App's growth potential ahead of a "potential new credit card." If those banks are sitting on the top half of earners in that demographic, that means they have about 75% to 90% of current Gen Z spending power, by his math.

"Block is likely moving too slowly to effectively capture credit/banking relationships of peak Gen Z," Faucette said. He thinks the company should be trying to get users under 21 but it faces some roadblocks. "[T]he population sizes of under 21-year-old cohorts are meaningfully smaller than current 21- to 22-year-old cohorts, meaning that by the time Block is prepared to aggressively drive credit products into market, the incremental market opportunity will be much reduced."

See also: Visa, Mastercard agree to lower credit-card fees in landmark merchant settlement

He also thinks broadly that the company isn't moving quickly enough on the credit side of the equation. "[G]iven the slow development of credit products, we believe that highest value Cash App users will churn at an accelerating rate as the largest cohort of high-income growth Gen Z (ages 21 & 22) will already have established other banking relationships before Block is fully prepared to push its credit products."

Faucette flagged risks related to the Square seller business and its ability to accelerate growth in gross profit. For example, the company faces growing competition and worse economics as it moves upmarket to larger merchants, and there's the possibility it sees and outsized impact from pandemic-era businesses that are closing, he said.

He lowered his price target slightly, to $60 from $62.

Block shares fell 6.1% in Thursday's session, with those losses intensifying late in the trading day alongside a sharp broad-market selloff.

-Emily Bary

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04-04-24 1736ET

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