Macquarie analyst Paul Golding likes the long-term outlook for Square-parent Block Inc., but he worries that a potential “valuation squeeze” could put pressure on its shares in the short run.
Golding downgraded Block shares
SQ,
to neutral from outperform Tuesday, writing of the possibility that consensus expectations for earnings before interest, taxes, depreciation, and amortization (Ebitda) could come down and weigh on Block’s stock.
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He noted that the company forecast a $2.1 billion year-over-year increase in adjusted operating expenses when it last reported earnings, and while he thinks that analysts appropriately translated that commentary to their own expectations for operating expenses, he wonders whether the consensus outlook bakes in enough of a corresponding impact to Ebitda.
“[W]e think the relation between non-GAAP Opex and adjusted Ebitda has not been properly reflected in consensus estimates,” he wrote. “This has resulted in consensus underestimating [realized] Opex (difference between gross profit and adjusted Ebitda) resulting in consensus FY22e adjusted Ebitda being overstated.”
Golding’s forecast for this year’s adjusted Ebitda is 5% below the consensus view, he noted.
Further, he cites the prospect of multiple contraction when it comes to Block, pointing to an average multiple of 68 times forward estimates for enterprise value to Ebitda since the company’s public listing, while noting that the multiple is only 51 times “when excluding the period 2020 onwards where valuations were driven by 0% interest rates in our view.”
“Given a shift away from unprofitable tech, we think multiples will refocus from sales-based to Ebitda-based, and multiples below those from 2020s onwards will become the new norm,” he continued.
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Otherwise, he sees Block as “attractive” over the long run based on his discounted-cash-flow model.
“We think Block’s longer-term outlook is still intact though,” Golding wrote. “After rebuilding our model from the ground up we forecast for Ebitda margins to trough in FY22 post Afterpay integration before seeing a gradual recovery from FY23 onwards.”
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Shares of Block are off more than 1% in premarket trading Tuesday. They’ve dropped 59% on the year as the S&P 500
SPX,
has fallen about 20%.
