Corporate bond research firm Gimme Credit initiated coverage on Block (SQ) with an Outperform rating in a note on Friday, citing strong financial performance and improving creditworthiness.
Following a positive first quarter, Block raised its 2024 guidance. While competition and regulations pose risks, Gimme Credit expects Block’s renewed focus on profitability to translate into significant EBITDA and free cash flow growth.
Block operates through Square (business solutions) and Cash App (consumer finance), generating revenue from transaction fees, lending, subscriptions and BNPL offerings. The BNPL space, which it entered through its acquisition of Afterpay, increases Block’s competitiveness against established players such as PayPal and Visa.
Despite regulatory investigations and a crowded market, Gimme Credit notes that Block posted 19% year-over-year revenue growth in the first quarter, with Cash App leading the way at 23%. Adjusted EBITDA rose to $633 million, and Block is on track to hit its “Rule of 40” profitability target by 2026.
According to the corporate bond research firm, Block’s credit profile is improving thanks to a strong cash position, positive free cash flow and leverage falling to 2.4x. Gimme Credit expects leverage to fall below 2x by year-end.
“Rising earnings, falling leverage, strong free cash flow and a net cash position bode well for Block's credit. The 6.5% senior notes due 2032 yield 6.1%,” Gimme Credit wrote. “That compares to 5% for similarly mature bonds issued by competitor PayPal, which has a larger market cap, higher EBITDA margin and investment-grade ratings.”
They concluded: “We believe Block's yields should fall as the gap closes over the next few years. We initiate coverage at 'outperform.'”
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