‘Clearly Positive' S&P Listing Adds Weight of Expectation on Block Stock (XYZ)

Business Insider

5 days ago

Block Inc. (XYZ) stock has given bulls something to celebrate after its recent addition to the S&P 500 (SPX) this week, triggering a 10% surge on the day of the announcement. While this milestone lends credibility to the investment case, the long-term return potential appears less compelling from an organic growth standpoint. J.P. Morgan analysts have hailed the move as a 'clear positive' and are forecasting around a 24% upside over the coming year.
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I remain Bullish on Block's digital payments ecosystem, but much of the optimism already seems priced in. The current valuation assumes strong growth through 2026, leaving the stock vulnerable to downside volatility thereafter. Consensus forecasts project 40% normalized EPS growth in Fiscal 2026, with the rate slowing to around 20% by Fiscal 2027.
Block Stock's Upside Is Limited by a Fair Valuation
Block's forward revenue growth rate of 8% is slightly higher than the sector median of 6.5%, but way lower than Block's five-year average of 44%. However, to offset this discrepancy, management has maintained substantial diluted earnings per share growth recently, with forward growth of 28.5% compared to 35.5% as a five-year average.
This relatively strong earnings growth presents a case for the stock being fairly valued right now, as its forward price-to-sales ratio of 1.93 is 32% lower than the sector median of 2.85 and 48% lower than Block's five-year average of 3.72.
Additionally, when examining the technical charts, the stock price is currently positioned just above the 50-week moving average and is approaching the bottom of the 200-week moving average. With the 14-week Relative Strength Index ('RSI') at 60, this combination of technical signals shows that Block is very reasonably priced, given that forward growth is expected by consensus to be quite strong.
Watch for Earnings Catalysts to Sustain Sentiment
Block is set to report its Q2 results on August 7, and investors should pay close attention to key metrics such as re-acceleration in gross payment volume (GPV), Cash App monetization trends—particularly average revenue per user—and management's outlook for second-half growth.
In Q1, Cash App likely had around 57 million active users, roughly flat year-over-year. However, gross profit grew 10% YoY, with gross profit per monthly active user up 9%. Meanwhile, the Square ecosystem—which serves business and professional users—posted a 7.2% increase in GPV, with international volumes surging 15% YoY. If similar momentum is carried into Q2, Block's valuation could remain elevated, particularly in light of its recent inclusion in the S&P 500 (SPY).
That said, Block has missed consensus EPS estimates for three consecutive quarters. With the S&P-driven sentiment boost now priced in, another earnings miss could spark a pullback in the stock.
Fundamentals Reveal a Healthy Company Worth Long-Term Holding
When evaluating an investment, it's essential to look beyond short-term price fluctuations and sentiment-driven events, such as earnings announcements or news headlines. The most compelling opportunities are rooted in a thorough understanding of a company's financial health and its impact on ongoing operations.
Block's balance sheet reflects a strong foundation, with $7.5 billion in cash and short-term investments reported most recently—giving the company significant flexibility to pursue growth initiatives. It also holds total equity of $21.44 billion, against total assets of $36.4 billion and total liabilities of $14.96 billion. This healthy capital structure suggests that the company is not overly burdened by debt, which improves its prospects for stable net income and smoother long-term growth.
Block's net income has been anything but consistent over the past decade, but that trend appears poised to shift. The company reported $166 million in net income for Fiscal 2021, followed by a $541 million loss in Fiscal 2022. However, it has since rebounded sharply, posting a substantial $2.615 billion net profit over the last trailing 12 months.
With the company now operating at a larger scale and holding a more substantial market share after years of aggressive expansion, a more sustained margin trajectory seems likely. While short-term volatility may persist, the risk of significant losses going forward appears much lower.
Is XYZ a Good Stock to Buy?
On Wall Street, XYZ stock carries a Moderate Buy consensus rating based on 28 Buy, six Hold, and two Sell ratings over the past three months. XYZ's average stock price target of $73 implies approximately 8.5% downside potential over the next twelve months.
Essentially, this can be due to a fair valuation and the fact that the company is facing lower revenue growth than historically, with a likely moderation in its normalized earnings per share growth in Fiscal 2027. As the market typically prices stocks according to fundamentals a year in advance, it makes sense why Wall Street views XYZ with some skepticism right now.
XYZ Uptrend Remains Intact Despite Short-Term Volatility
I remain long-term Bullish on Block, though some short-term volatility is likely. Existing investors may consider holding or even increasing their positions, while prospective investors should carefully assess their risk tolerance and investment horizon before jumping in on XYZ.
From a technical and fundamental perspective, the stock appears fairly valued, but it could face downside pressure over the next 12 months as earnings growth moderates following sentiment-driven gains from its inclusion in the S&P 500. Still, short-term pullbacks or sideways movement don't rule out the possibility of the stock surpassing $100 in the coming years. It's a solid investment—but not a top-tier pick at this stage.