Investing.com -- BMO Capital Markets has downgraded Block Inc. (NYSE:SQ) to a "market perform" rating from its earlier "outperform" stance, citing concerns about the company's ability to sustain gross profit growth in the coming years.
The analysts flagged several factors behind the decision, which also included raising the price target slightly from $94 to $100.
According to BMO, Block's shares have jumped by 22% since its third-quarter earnings report. The firm cautioned that the pace of earnings surprises seen this year will be challenging to replicate in 2025 and 2026.
A primary concern lies in Block's reliance on its Cash App division for incremental gross profit growth, which is increasingly being driven by credit and lending products such as Cash App Borrow and buy-now-pay-later offerings.
BMO views these sources as less durable and lower-margin compared to the company's other business areas.
Another factor weighing on the decision is the lack of growth in Cash App's active user base, which has stagnated at around 57 million for the past three quarters.
This stability raises questions about the ability to further monetize these users without major changes to growth trends.
While consensus estimates predict continued gross profit growth for Cash App, BMO analysts expressed skepticism about the feasibility of such forecasts, particularly given the challenges in scaling direct deposit accounts—a critical driver for long-term customer retention and profitability.
BMO also pointed out the ambitious targets Block has set under its "Rule-of-40" framework, which seeks mid-teens gross profit growth alongside adjusted operating margins of 25% or more by 2026.
Achieving these benchmarks while capping the company's workforce at around 12,000 employees would require exceptional productivity, with gross profit per employee approaching levels seen at Mastercard (NYSE:MA) and Visa (NYSE:V).
Analysts flagged this as a particularly high hurdle for Block and raised concerns about whether sustained gross profit growth would be achievable without lifting the headcount cap.
Despite the downgrade, BMO noted some positive aspects, including the company's significant strides in improving operating margins and its potential as a beneficiary of Bitcoin's ongoing appreciation.
However, they emphasized that Bitcoin-related revenues account for only about 3% of Block's gross profit, suggesting limited material impact from cryptocurrency price fluctuations.
The price target increase to $100 reflects a forward adjustment in valuation methodology to 2026 estimates but also considers potential risks to the gross profit mix shift toward Cash App, which is less profitable than other segments.