Investors don’t seem to be giving Block Inc. enough credit for its Cash App mobile wallet, especially in light of how they view other payment-technology companies.
That’s the view of Bank of America analyst Jason Kupferberg, who upgraded shares of the Square parent company to buy from neutral in a Friday note to clients. The stock is up about 7% in Friday trading.
Kupferberg called the stock “quite undervalued” as his sum-of-the-parts analysis indicated that the market only assigns about $6.5 billion of value to Block’s
Cash App business. That translates to roughly $93 per user, compared with $326 for PayPal Holdings Inc.
and $1,472 for Affirm Holdings Inc.
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“Considering we forecast Cash App could generate gross profit of $2.90 billion and $3.86. billion in 2022E and 2023E, respectively, the implied value of $6.5 billion for Cash App seems way too low,” he wrote.
Part of the issue may be a lack of forward-looking commentary on the Cash App business, but Kupferberg thinks that the company could offer some “clarity” there as early as Feb. 24, when it is next due to report earnings.
Block shares have been hit hard in recent months and are down roughly 60% from their Aug. 5 closing high of $281.81, compared with a near 5% decline in the Nasdaq Composite Index
and a near 2% gain in the S&P 500 index
over the same time. Kupferberg attributes the decline to a broader selloff in growth names as well as “continued limited visibility on the near-term and medium-term trajectory of Cash App gross profit (GP) growth,” especially after PayPal pointed to spending pressure among lower-income groups on its own earnings call.
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In general, Kupferberg notes that Block is the only one of the payments companies he covers that has held off on bringing back a top-line forecast.
“[W]e think it is important for management to provide some earnings visibility to instill investor confidence by reinstating top-line guidance on the 4Q call Feb. 24, at least for 1Q22 if not the full year,” he wrote. Kupferberg will also be looking for updated commentary on expected Afterpay synergies now that Block’s deal for the buy-now pay-later company has closed.
Block is scheduled to report fourth-quarter results on Feb. 24, after the closing bell.