Block (SQ, Financials), the parent company of Square payment system and Cash App, was downgraded to Market Perform from Outperform by BMO Capital Markets; Block shares are down 1.2% in Monday's early morning trading.
Analyst Rufus Hone pointed up difficulties reaching gross profit targets without increasing personnel of the business.
Hone stated in a client assessment that it might be challenging to maintain the company's current financial outperformance until 2025 and beyond. He underlined hazards related to Block's Cash App segment's gross profit increase as well as the company's aspirational "Rule of 40" ambitions for 2026. The Rule of 40 aggregates profit margin with revenue growth rate of a corporation. While sustaining mid-teens gross profit growth, Hone pointed out that reaching gross profit per employee of about $1 million—which approaches levels observed at Mastercard—represents a major hurdle.
Driven in part by expected gains from deregulating and pro-Bitcoin policies under a Trump administration, Block's recent stock surge has elevated expectations for future share performance, Hone said. He did warn, however, that the Cash App company's future is not entirely bright. For three straight quarters, active user growth in the sector has been constant; predictions indicate acceleration in growth through 2025. Should user growth be inadequate, significant improvements in monetization and inflows per active user would be needed to satisfy demand.
Hone also raised questions about Block's under 12,000 staff head count restriction. Although this limit has helped to increase margins in 2024, he pointed out that keeping it in place through 2026 would mean gross profit per employee approaching $1 million—second only to Visa (V, Financials) and Mastercard (MA, Financials) among the corporations he follows.
