Block's stock has more than 50% upside after a 'massive pullback,' BofA predicts

By Emily Bary

BofA likes the company's earnings potential and thinks Block shares should fetch a higher valuation

Block Inc. shares have seen a "massive pullback" since the end of July, but BofA Global Research analyst Jason Kupferberg sees a buying opportunity in the payment-technology name.

Kupferberg remains upbeat about Block's (SQ) earnings potential, noting that the company "has made positive strides in reducing its cost structure" yet has the opportunity to move even more quickly in pursuit of becoming a Rule of 40 company based on the sum of its gross-profit growth and adjusted operating margin.

See also: Block's stock has been a laggard lately. Will management shakeup provide a needed jolt?

Block's operating-expense growth has been "elevated" as a percentage of gross profit relative to PayPal Holdings Inc. (PYPL) and Intuit Inc. (INTU) when they were of similar size and growth, according to Kupferberg's analysis. Were Block to close the gap even halfway, he thinks the company could post 2024 adjusted earnings before interest, taxes, depreciation and amortization (Ebitda) 20% higher than what Wall Street is currently modeling.

Investors could get some positive profit news even before that, however, as Kupferberg sees the possibility that Block raises its 2023 adjusted Ebitda outlook on its third-quarter earnings call in early November, owing to recent operating-expense discipline.

Read: PayPal's stock has 'catalysts aplenty' -- but this analyst still feels cautious

Kupferberg also thinks that Block's gross-profit growth should earn it a higher valuation. "Consensus is modeling a 16-17% [gross-profit compound annual growth rate through 2025], and even if this proves to be modestly too high, we believe this growth profile justifies a materially higher multiple," he wrote.

He noted the stock's "depressed valuation" and recommended that the board "intensify its operational oversight, to ensure that [Block] maintains its tradition of product innovation, while executing on the evolving distribution model at Square."

Kupferberg has a buy rating on Block's stock along with a $71 price objective -- more than 50% above current levels.

Block shares have lost 43% since closing at $80.53 on July 31, though they gained about 5% in Tuesday's action.

-Emily Bary

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10-11-23 0743ET

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