On February 21, Block's shares dropped by 16% during morning trading due to a deceleration in spending growth. This development has shifted attention to the company's focus on buy-now, pay-later lending to drive profits by 2025.
Consumer spending has been restrained amidst trade policy uncertainty in the wake of the new Trump administration and persistent high interest rates. Despite a robust labor market and stable wage growth, spending growth has been limited.
Block's Cash App business, facilitating peer-to-peer mobile payments, reported a 16% gross profit growth in the holiday quarter, down from 25% the previous year. The digital payment sector faces intense competition, with tech giants such as Apple and Google expanding their presence while industry leaders like PayPal diversify their offerings to appeal to cautious customers.
Amid these challenges, the uncertainties around the long-term economic viability of the Cash App business linger, as noted by Brett Horn, senior equity analyst at Morningstar.
Block’s business-focused Square unit also experienced a slowdown in growth, with gross profits rising by 12% compared to 18% a year earlier.
The company's market value is expected to depreciate by approximately $8 billion by the end of the session. Following the results, three brokerages have adjusted their price targets for the stock.
In an effort to shore up profits, Block anticipates a minimum 15% year-over-year growth in gross profit by 2025, along with margins expanding around 240 basis points. Analysts consider expanding Buy-now, pay-later (BNPL) services as a crucial growth driver for Block.
The potential of BNPL services is substantial, with forecasts indicating a market size surpassing $160 billion by 2032. Key players like Walmart, Target, and Amazon are venturing into this space to attract younger, credit-averse shoppers, alongside fintech companies like Block and PayPal.
With a streamlined approval process and revenue generated through user fees, BNPL is an appealing option for fintech enterprises. Block expects Cash App’s growth to accelerate by scaling Afterpay products on the platform and bolstering marketing efforts, as emphasized by CFO Amrita Ahuja post-earnings.
Although Oppenheimer analysts anticipate a weaker first quarter due to a leap year and a stronger dollar, they remain optimistic about Block's outlook for 2025.