Rothschild upgrades Block as valuation resets, but flags loan loss risks

Investing.com -- Rothschild upgraded Block to Neutral after a sharp share price decline, though it warned rising loan losses could weigh on earnings.

There are concerns over balance sheet use and weaker performance in Block’s Square payments business. It said both have largely played out, with the stock down about 70% since initiation.

Block now trades at around 13x 2027 GAAP earnings, which Rothschild said aligns with neobank peers, reflecting a change in investor perception as growth shifts toward its Cash App business.

“Our thesis was predicated on balance sheet use impacting the rating and the payments business falling behind peers. Both have played out. Given revenue growth comes from CashApp, we believe the market is increasingly viewing Block as a neobank,” analysts said.

The firm said about 70% of future revenue growth is expected to come from Cash App, driven in part by Borrow, the company’s unsecured lending product. Nationwide availability of Borrow and deeper use among existing users are expected to support growth.

Rothschild raised its earnings estimates by 28% to 34%, citing stronger lending growth and lower costs, including savings tied to artificial intelligence. It also expects operating margins to rise to about 29% by fiscal 2028.

However, the brokerage said consensus estimates may understate credit risks, forecasting loan losses to rise toward management’s 3% tolerance level as lending expands. Its adjusted EPS estimates for 2026 to 2028 remain 4% to 11% below consensus.

Rothschild also flagged continued pressure on Square, with U.S. volume growth lagging competitors, including Shopify’s in-store offering, and said recent headcount reductions could weigh on recovery.

The brokerage raised its price target to $55 from $45, implying about 8% upside, and said the stock’s re-rating leaves limited near-term upside.