Block stock: Here are the keys for breakout

Investing.com -- Deutsche Bank remains bullish on Block Inc., reiterating its Buy rating with a $98 price target on the stock in a note Tuesday.

The bank highlights several catalysts that could trigger a stock breakout, citing new partnerships, improved product offerings, and momentum in Cash App. Growth Catalysts and Earnings

Deutsche Bank expects Block to outperform in its upcoming third-quarter earnings report on November 7.

"Our core model calls for gross profit growth of ~17% year-over-year and adjusted EBITDA of ~$695 million with ~31% margins," says Deutsche Bank.

The analysts suggest potential upside in both gross profit and adjusted EBITDA, estimating at least $50 million in additional EBITDA if results beat forecasts.

The report notes that Block is currently undervalued compared to peers, stating, " SQ remains attractive on valuation vs. peers (~10x CY26 EV/EBITDA vs. ~18x for peers)." Deutsche Bank views Block as "one of the higher quality market share gainers " in the fintech sector. New Partnerships to Boost GPV Growth

To reinvigorate seller growth, Block is expanding its distribution partnerships. Deutsche Bank believes "the company will begin relying on channel partnerships as a major leg for future distribution."

A notable example is the collaboration with US Foods, which will promote Block's software and hardware to its 250,000 customers, giving Square access to 40% of U.S. restaurants.

"Additionally, we believe Square could be willing to partner with financial  institutions, which could quickly change the trajectory of SQ GPV," adds the bank.

"Distribution efforts should maintain a more targeted, vertical focus," the note states, emphasizing that these initiatives are still in an experimental phase .

For the third quarter, the bank is forecasting ~7% year-on-year GPV growth at Square,  which they expect "will move up to 10%+ in FY25 as the company works to drive a reacceleration in volumes." Cash App

Deutsche Bank notes that Cash App continues to exceed expectations, with analysts forecasting 20% gross profit growth for Q3 2024.

Block's efforts to integrate Afterpay's buy-now-pay-later (BNPL) services onto the Cash Card are expected to boost profits by 2-4 percentage points in FY25 and FY26.

"Afterpay is now being fully reported within Cash App,  and we expect a continued focus on linking the two ecosystems, particularly on the back of new sales efforts led by Afterpay co-founder Nick Molnar," adds the bank.

The integration of direct deposit features—such as overdraft protection and savings yields—into Cash App is also seen as key to driving growth, with the bank estimating a 10% year-over-year increase in inflows per active user next year.

Furthermore, they see the potential for the launch of BNPL functionality on the Cash Card to potentially add ~2ppt of upside to its FY25 Cash App gross profit estimate and ~3-4ppt of upside to its FY26 Cash App gross profit.

"We believe that this represents what could be a larger opportunity for SQ as it continues to drive engagement on the integrated Cash App/Afterpay platform and as it continues to enhance the overall commerce experience,  including affiliate marketing, merchant discovery, and Cash App Pay," concludes Deutsche Bank.

Source: Investing.com