Payment processor Block Inc. found its share price tank by more than 20%. This precipitous decline came after the company’s 3Q23 earnings release that included a terrible guidance cut. Investors certainly weren’t expecting such a “brutal” report. Consequently, a slew of investment banks and other financial firms slashed their target price for Block overnight.
Block’s first-quarter earnings report was nothing short of incredible. Its Cash App produced $1.38 billion in gross profit, up 10% year-over-year. However, this number was well below the $1.42 billion consensus expected by StreetAccount analysts. Additionally, Block missed on revenue, gross profit, and payment volume all around, sparking fears from investors.
Block’s CEO, Jack Dorsey, opened the company’s earnings call, projecting a clear understanding of the vulnerability endemic to the cashless ecosystem. He stated, “I just don’t think we were focused enough and had enough attention on the network and the network density, and that is our foundation.” Like any admission of guilt, this proclamation serves to identify the shortcomings that resulted in the lackluster results across the metrics.
The company cut its full-year guidance by a considerable amount. This decision is a result of macroeconomic uncertainty, decreasing consumer spending and less-than-expected inflows. To face these concerns, Block will increase its marketing budget by 50% in Q2. The new funding will help accelerate this growth in a smart way.
Though Cash App has 57 million monthly active users, user growth was stagnant in Cash App’s reporting period. Inflows for Cash App increased by just 8%. This was even in the face of adding in new features such as Afterpay on its Cash Card. Analysts were worried about Cash App’s growth story considering these numbers.
Wells Fargo downgraded Block’s stock to Equal Weight, citing “numerous Cash App monetization red flags.” The firm made it clear that a dramatic turnaround was required. Their conclusion was that Block needed to “unveil a Hail Mary for the second half.” Likewise, Seaport highlighted multiple quarters of declining Cash App gross payment volume (GPV) growth.
Benchmark also expressed skepticism about Block’s growth trajectory, noting that “stagnation in the number of active users of the app is even more concerning than users’ reduced spending.” The firm stated, “We are not sufficiently confident in the likelihood of such a rebound to recommend buying the stock on weakness.”
In contrast to Block’s struggles, PayPal reported a 20% revenue jump for its Venmo service in the first quarter, driven by increased adoption of Venmo’s debit card and instant transfers. As Venmo pushes to expand more spending at the checkout counter, Cash App is diving further into loans and banking.