Jack Dorsey’s Block (NYSE: SQ) was among the high-octane growth stocks that faltered last year, but the crypto-correlated fintech juggernaut is rebounding nicely in the first quarter, and some sell-side analysts are taking note.
Momentum for the purveyor of the Square point-of-sale (POS) systems is beneficial to an assortment of exchange traded funds, including the VanEck Digital Transformation ETF (DAPP). DAPP, which follows the MVIS Global Digital Assets Equity Index, had an allocation to Block of nearly 8% as of March 15, making the stock the ETF’s third-largest holding.
DAPP is one of 162 ETFs with some exposure to Block, but just six have larger weights to the shares than does the VanEck fund. Those benefits are tangible at time when Block is rallying. The shares are up 19.49% year-to-date, and the stock is playing a part in DAPP’s jaw-dropping 51.57% 2023 gain.
Block could be a contributor to more DAPP upside as 2023 unfolds, particularly if the company is able to weather volatility among small business clients and diversify Cash App’s revenue streams.
“We downgraded Block to Neutral in September on the premise of stagnating Cash App inflows per user, growing mix of higher risk payday lending, and rising competitive pressures in merchant acquiring,” said Mizuho Securities analyst Dan Dolev in a Thursday note to clients.
While Dolev previously had pause about the outlook for Block, he sounded a more bullish tone on Thursday, upgrading the stock to “buy” from “neutral” while lifting his price target on the name to $93 from $80. That revised price objective implies upside of nearly 24% from the March 16 close.
Mizuho estimates that Block can generate up to 30% upside to its 2023 earnings per share estimates and that margin expansion could be a long-term catalyst for the company.
“Plus, Block remains uniquely positioned to achieve the ‘holy grail’ of creating a one-stop-shop network by connecting the point-of-sale, Cash App and BNPL ecosystems,” added Dolev.
Regarding Cash App, there may be headwinds for the digital wallet side of Block’s business, but there are opportunities as well. Along with PayPal’s (NASDAQ: PYPL) Venmo, Cash App is the dominant digital wallet and a favorite among folks seeking traditional banking services without the pesky fees levied by old guard banks.
“Our concerns over sustainability of Cash App revenue remain,” Dolev added. “However, we applaud management’s recent commitment to cost-containment.”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.