SQ - Block: Success In Chasing A Big Market Opportunity Deserves A Higher Target Price

2024-04-02 02:10:17 ET

Summary

• I reaffirm my "Buy" rating on Block stock, supported by strong commercial performance in FY 2023, with 26% YoY topline and 25% YoY gross profit growth clearly outpacing analyst expectations.
• Heading into 2024 and beyond, I like SQ's ambition to tap into a $205 billion total addressable market - with a penetration upside of 95%.
• This ambitious plan, paired with strong management execution against objectives, is likely a key driver for uptrending EPS consensus projections.
• In conclusion, I revisit my residual earnings model for Block's valuation; and my calculation now suggests a fair implied target price of $104.

Block ( SQ ) shares are up about 34% since I argued the stock was a Buy about a year ago. Today I am confident to reiterate my "Buy" recommendation, as I see my original thesis on Block supported by strong full year 2023 results, with Block managing to score 26% YoY growth, as well as a positive inflection on operating income. Looking into 2024 and beyond, I am encouraged to note Block management's ambition to chase after a $205 billion TAM with an estimated 95% penetration whitespace. On that note, management guided a three-part growth strategy, including (1) banking their base, (2) moving upmarket by serving families, and (3) building the next-generation social bank. Or in other words, Block is aiming to convert existing P2P and Cash App Card users into primary banking clients. Against the backdrop of uptrending EPS consensus estimates for Block through 2030, I am updating my residual earnings framework for the company's stock; and I now calculate a fair implied share price equal to $104....

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