It’s been over two years since Block (NYSE:SQ) has traded in the $200s. Over the past five years, it’s been a losing proposition, with SQ stock losing nearly 39%.
Now, one analyst suggests its shares could be dead money for the remainder of the year as the payments company faces one setback after another. Fortunately for shareholders, Citigroup (NYSE:C) maintains a Buy rating on its stock.
“We remove the stock as one of our top picks, now recognizing upside versus the fiscal year 2023 earnings before interest, taxes, depreciation and amortization outlook for $1.5 billion is likely off the table and the stock is likely to remain rangebound in the second half of 2023,” Barron’s reported. Those comments came from Citigroup analysts in an Oct. 4 note to clients.
The ominous tone of the Citigroup forecasters begs the question: Where is Block stock heading in 2024?
I’ve been a fan of the company’s various products for a long time. I remain optimistic about its chances in the year ahead.
Barring a major recession, I see SQ stock hitting $60 in the next 12 months. Here’s why.
The Argument for Block Moving Higher
While Citigroup analysts have tempered their excitement for Block’s shares — they lowered its target price by $25 on Oct. 4 to $65 — Wall Street remains in the company’s corner with 32 of the 48 analysts giving it an Overweight or Buy rating and a median $76 target price.
Even the Citigroup team had good things to say about Block despite lowering its target price on its shares.
“We maintain our Buy rating, believing execution can rebound,” the analysts wrote. “For us, Block’s continued ecosystem integration and product development opportunities (both TAM expanders) are too big to ignore over the next 12 months,” Barron’s reported.
Another analyst, Bank of America’s (NYSE:BAC) Jason Kupferbeg, chimed in on Oct. 10, jumping to the company’s defense. He suggested the recent fall in Block’s share price does not reflect the company’s potential upside. Kupferbeg is one of the 27 analysts who rated SQ a Buy.
An Overreaction to Service Outages
One area where I would argue investors have overreacted is Block’s service outages in September. The outages started at around 3 p.m. EST on Sept. 7 and continued into Friday. Thousands of Square and Cash App customers were unable to use their accounts. The problem was rectified by midday Friday.
On Sept. 11, the company sent a press release outlining the steps taken to ensure these issues don’t crop up in the future. While the inconvenience to customers isn’t a good look, it allowed the company to strengthen its systems. That’s good news in my book. Square is making lemonade out of lemons.
A week after the outages, Block announced that Square CEO Alyssa Henry would leave the company as of Oct. 2. While there is no evidence the long-time executive at Square was made to walk the plank, it does suggest that Block CEO and co-founder Jack Dorsey is eager to make a change at the top to move the merchant payments business in a different direction, operationally speaking.
Retail Dive reported comments from Wolfe Research analyst Darrin Peller on Sept. 18. Although Henry was eager for a break from business, it’s a sign Dorsey wants to be closer to his original baby. The analyst believes that’s a good thing. I couldn’t agree more.
“While some of Square’s success over the years should be attributed to Alyssa’s execution, the company’s more recent performance remains a concern for investors (and we suspect for management, internally),” Peller wrote.
For now, Dorsey will run Square.
Why a $60 Share Price?
Block is valued at 1.39x sales, the lowest multiple over the past decade. If we use its five-year average of 6.79x and cut that in half to 3.40x, we get a market capitalization of $67.0 billion based on trailing 12-month revenue of $19.7 billion.
Block’s current market cap is $26.8 billion, less than half what it would be with a more reasonable P/S ratio.
I’m more than comfortable with a $60 target in 2024. You should be, too.
On the date of publication, Will Ashworth did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
