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Tougher economic times can force companies to grow up, and Block Inc. is winning praise for heeding the call.
While the payment-technology company posted a mixed earnings report Thursday afternoon, the overwhelming highlight seemed to be management’s discussion of a new “investment framework.”
Under this framework, Block
SQ,
the company formerly known as Square, will aim for gross-profit retention of at least 100% for each ecosystem within the business and for the broader company. Chief Executive Jack Dorsey’s enterprise will also strive to be a “rule of 40” company based on the sum of gross-profit growth and adjusted operating margin.
Additionally, Block will put more of a focus on adjusted operating margin versus adjusted earnings before interest, taxes, depreciation and amortization (Ebitda) in an effort to convey true costs to investors. Management acknowledged that stock-based compensation, excluded from the adjusted Ebitda metric but not from adjusted operating income, is a real expense even if it isn’t a cash expense.
The company’s “self-awareness and heightened focus on running a profitable business, sustainably” was “refreshing,” according to SMBC Nikko Securities America analyst Andrew Bauch.
Shares of Block, which houses Cash App, Square and other businesses, were up more than 7% in premarket trading Friday.
“While it will likely take multiple quarters of positive messaging combined with stable trends to fully shake its perception of an often-frivolous deployer of investor capital, we can’t think of a time in company history where management has sounded as more measured, disciplined, and receptive to input from its largest shareholders,” Bauch wrote in a note to clients titled: “Adulting Can Be Uncomfortable, but Deserves Respect.”
Bauch has a neutral rating on Block’s stock and upped his price target to $90 from $80.
See also: PayPal CEO’s ‘unusual’ $2 million stock purchase is ‘certainly a positive’ signal
Other analysts liked the newfound discipline as well.
“This increased focus on GAAP earnings comes at an opportune time: in the current period of macroeconomic uncertainty (e.g., interest rates, inflation, economic growth), investors are increasingly focused on business health, including factors such as earnings quality (typically measured as the difference between GAAP and non-GAAP figures) and cash generation,” wrote SVB MoffettNathanson analyst Lisa Ellis, who rates the stock at outperform with a $110 price target.
Barclays analyst Ramsey El-Assal added: “We believe that during periods of macro stress, investors have a much greater appetite to evaluate companies on more of a GAAP basis.”
In his view, Block’s “use of adj. operating income in its Rule-of-40 metric signals an increasingly investor-friendly attitude to us” and “indicates that [Block] acknowledges it can be held to, and potentially surpass, common industry yardsticks.”
The company also seems to be more focused on “careful spending” as it targets lower growth rates in head-count and marketing expenses for this year than what was seen last year, he noted.
El-Assal has an overweight rating and a $103 target price on Block shares.
Achieving rule of 40 status is aspirational for Block at this point, management acknowledged on the earnings call.
“While the new framework is music is investor ears who have long complained about [Block’s] high [stock-based compensation] & less focus on profitability, we will closely monitor progress (e.g., on implications for growth as some expenses are trimmed/optimized),” Bernstein’s Harshita Rawat wrote. “Also it is still early days for e.g., [Square] is not achieving Rule of 40 today (under its new adj. operating income definition).”
Rawat rates the stock at outperform and boosted her target price to $90 from $80 after the latest report.
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