Rising Regulatory Burdens And Cyber Risks Will Erode Profitability

Key Takeaways

• Expanding regulatory pressures, cyber threats, and dependence on cryptocurrency inflows add cost burdens and amplify earnings volatility for Block.
  
• Growing competition and emerging government-backed payment systems threaten Block's core payment business, potentially limiting revenue growth and compressing margins.
  
• Rapid product innovation, cross-platform integration, and diversification into new markets and customer segments strengthen user engagement and position Block for sustained long-term growth.

Catalysts

Block, Inc., together with its subsidiaries, builds ecosystems focused on commerce and financial products and services in the United States and internationally.

• Intensifying global regulatory scrutiny and new data privacy laws are expected to significantly raise compliance costs as Block expands internationally, introducing operational complexity and likely reducing future net margins as new regions enact stricter rules for fintech companies.
  
• The growing risk and sophistication of cyberattacks and digital payments fraud will likely force Block to make continual, heavy investments in cybersecurity, ultimately eroding profitability and potentially constraining earnings growth over the coming years.
  
• As central banks accelerate development and rollout of digital currencies and government-backed payments infrastructure, demand for third-party platforms like Block's may decline over time, putting sustained downward pressure on long-term revenue growth and transaction volumes.
  
• Block's increasing reliance on Bitcoin trading revenue through Cash App exposes its results to prolonged volatility or regulatory crackdowns on cryptocurrencies, creating unpredictability and the risk of sharply declining revenue streams in downturns.
  
• Fierce competition from both established players and new market entrants is expected to intensify and commoditize core payment and financial services, forcing lower transaction fees across the industry and compressing Block's net margins as it struggles to defend its market share.

Block Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Block compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Block's revenue will grow by 5.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 12.4% today to 6.6% in 3 years time.
• The bearish analysts expect earnings to reach $1.9 billion (and earnings per share of $2.99) by about September 2028, down from $3.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 21.6x on those 2028 earnings, up from 15.5x today. This future PE is greater than the current PE for the US Diversified Financial industry at 16.6x.
• Analysts expect the number of shares outstanding to decline by 1.65% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.7%, as per the Simply Wall St company report.

Block Future Earnings Per Share Growth

Risks

• The company is experiencing accelerating product innovation and increased product velocity-such as rapid launches of features like Cash App Pools and Square AI-which enhances user engagement and supports sustainable revenue growth.
  
• Block's ecosystem is demonstrating strong cross-platform integration between Square, Cash App, and Afterpay, resulting in compounding user engagement, higher ARPU, and better gross profit margins over time.
  
• International expansion is delivering 25 percent year-over-year GPV growth and 19 percent gross profit growth, which diversifies the company's revenue streams and reduces dependence on the US market.
  
• Investments in embedded finance products, including banking services and lending through Square Financial Services and robust credit underwriting using proprietary data, are deepening customer relationships and driving higher margin revenue growth.
  
• Early signs of success with innovative products targeting new demographics-such as teens and small businesses, as well as high engagement among primary banking users-position Block to capture a larger share of the cashless and digital finance megatrend, supporting long-term consolidated earnings growth.

Valuation

• The assumed bearish price target for Block is $55.42, which represents two standard deviations below the consensus price target of $85.64. This valuation is based on what can be assumed as the expectations of Block's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $104.0, and the most bearish reporting a price target of just $35.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $28.3 billion, earnings will come to $1.9 billion, and it would be trading on a PE ratio of 21.6x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of $74.94, the bearish analyst price target of $55.42 is 35.2% lower.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.