What happened
Shares of Block (SQ -1.57%) traded sharply lower on Wednesday morning, falling as much as 5.7%. As of 11:57 a.m. ET, the stock is still down 3.2%.
The catalyst that sent the fintech company lower was a rare double downgrade and a dire analyst outlook regarding macroeconomic conditions and Block's future prospects.
So what
Evercore ISI analyst David Togut issued a rare double downgrade on Block stock to underperform (sell) from outperform (buy), according to The Fly. At the same time, the analyst slashed his price target by more than half, down $55, from its previous level of $120. That suggests additional downside for investors of another 21%. For context, Block stock has already shed 74% of its value since late last year.
Given current macroeconomic uncertainty and the ongoing battle with inflation, the analyst is anticipating "growing headwinds," particularly with Block's buy now, pay later (BNPL) business. He sees increasing competition and tighter credit policies resulting from a slowing economy. While the company has made "significant strides" by fueling Cash App growth via increasing engagement and greater monetization, he believes the BNPL business will weigh on Block's profits from lower margins from Cash App.
Now what
It's important to remember that analysts generally focus on the coming three to six months (and on rare occasion as far out as a year). This short-term outlook gives individual investors an advantage, as we're not shackled by current events and have the luxury of looking out three to five years.
Given its reliance on consumer spending and the broader financial outlook for its success, it's increasingly likely that Block will face headwinds as the economy works its way through the current challenges. Five years from now, however, it's likely no one will remember today's double downgrade, as Block's robust payments ecosystem and digital wallet are paving the way for a bright future. Block stock is a buy.
