Block Inc. shares have experienced a significant downturn since the end of July. However, BofA Global Research analyst Jason Kupferberg believes that this presents a prime opportunity for investors in the payment-technology industry.
Kupferberg remains optimistic about Block's earnings potential, pointing out the company's efforts in streamlining its cost structure. Moreover, he believes that Block has the potential to further accelerate its growth and become a "Rule of 40" company by enhancing its gross-profit growth and adjusted operating margin.
Block's Operating Expenses vs Competitors
Kupferberg's analysis revealed that Block's operating-expense growth, as a percentage of gross profit, has been higher compared to similar-sized and growing companies like PayPal Holdings Inc. and Intuit Inc. If Block manages to bridge this gap, he predicts that the company could achieve adjusted earnings before interest, taxes, depreciation, and amortization (Ebitda) in 2024 that is 20% higher than current Wall Street estimates.
For more information on Block's recent performance, read our analysis on whether a management shakeup can revitalize the company.
Positive Profit Outlook for Block
Investors in Block could potentially receive positive profit news earlier than expected. According to analyst Kupferberg, there is a possibility that Block will raise its 2023 adjusted Ebitda outlook during its third-quarter earnings call in early November. This is due to the company's recent efforts in controlling operating expenses.
Gross-Profit Growth and Valuation
Kupferberg believes that Block's gross-profit growth should result in a higher valuation for the company. Even if the consensus estimate of a 16-17% compound annual growth rate through 2025 proves to be slightly too high, Kupferberg asserts that the growth profile justifies a significantly higher multiple for the stock.
Recommendations for the Board
Kupferberg suggests that Block's board should pay attention to the stock's currently "depressed valuation" and take steps to ensure operational oversight. This will help maintain the company's tradition of product innovation and effectively implement the evolving distribution model at Square.
Buy Rating and Price Objective
Kupferberg has given Block's stock a buy rating and set a price objective of $71. This target reflects a more than 50% increase from the current levels of the stock.
Block shares have experienced a decline of 43% since July 31, closing at $80.53. However, there was a 5% gain in Tuesday's trading activity.
