Block Inc (NYSE:SQ)
According to a study from an analyst who stated that “many small risks are starting to add up” for the payments business, Block (NYSE:SQ) has challenges that go beyond a short-seller report that pummeled its shares last month. The research stated that “many small risks are starting to add up”
The stock of the company, which is being run by Jack Dorsey, who was formerly the CEO of Twitter, is declining.
Analysts at Keefe, Bruyette, and Woods, led by Steven Kwok, said in a note on Sunday that “Block is facing a growing number of risks that we think will keep investors out of the name over the next year.” These risks mostly revolve around rising competition in the acquisition and the potential for regulatory scrutiny in Cash App. “We think investors will stay away from the name over the next year because of these risks,” the analysts said. They lowered their price objective from $90 to $75 and downgraded the company from Outperform to Market Perform as a result.
In the first few minutes of trading on Monday, shares of Block (NYSE:SQ) dropped by 2.9%. On Thursday, just before the Easter holiday weekend, they had a final price of $68.10.
Block, which is comprised of the mobile payments network Cash App, the point-of-sale system Square, and the service Afterpay, which allows users to “buy now, play later,” has had a difficult couple of weeks. After Hindenburg Research declared a short position and alleged that Block had inflated user metrics and didn’t rein in unlawful conduct by consumers on its Cash App platform, shares in the group dropped by 15%, falling from well above $70 in March. This happened after Hindenburg Research disclosed a short position. A deal that can be thought of as a bet against the price of a stock is called a short position.
In response to the charges, Block first stated that it would investigate the possibility of taking legal action against Hindenburg, and then it issued a comprehensive rebuttal to the claims. In a statement, the business detailed the number of users who had their accounts validated and reiterated its stringent commitment to risk and compliance.
On Wall Street, the response has been mainly positive, and the stock continues to get an average rating of Buy from analysts surveyed by FactSet, who have set an average price objective for the stock that is above $95.
The analysts at Keefe, Bruyette & Woods stated in their report, “We acknowledge the company’s response to the accusations,” but they aren’t as optimistic as some of the other analysts.
“Regulators who are seeking a victory could, all the same, step in to demand more stringent measures. According to the statement made by Kwok’s team, “History has shown that this could both impact growth and add costs, specifically by adding friction or checks at onboarding.” “Despite the fact that this is, by its very nature, a difficult area or item to forecast, it is something that investors are now, and quite rightly so, beginning to discount into the stock.”
The analysts at Keefe, Bruyette & Woods have a number of worries, some of which are unrelated to the regulatory issues that are associated with the short-seller claims.
These are primarily concerned with the intensifying rivalry that is taking place within the payments industry as a result of the introduction of new competing platforms. According to Kwok’s team, “This could put pressure on volume growth as well as take rates and, ultimately, profitability.”
In addition to this, the analysts pointed out that Block is “dependent on income streams that are increasingly being viewed as not being quite as rock solids as others, such as instant deposit fees, and unregulated interchange.” “And [buy now, pay later] lending, which is popular among consumers who do not qualify for prime rates, is another area about which we are growing increasingly concerned given the context.”
Although the price goal continues to reflect some upside from current levels, the recent downgrade and gloomier perspective on the shares are currently going against the conventional wisdom, even though the price target continues to represent some upside. However, it could be a sufficient reason to exercise caution with regard to the stock.
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