Goldman Sachs: Block's Ecosystem Synergies Accelerate; Diversified Profit Growth Supports Valuation

Overview

This report is based on a roadshow meeting between Goldman Sachs and Block's Investor Relations lead. The core conclusion is that the company is realizing ecosystem synergies, Cash App growth drivers are diversifying, Square distribution expansion is accelerating GMV growth, and potential margin improvement following workforce reduction supports a bullish outlook. The report maintains a Buy rating with a target price of $95, implying a 17x P/E for 2027 expected earnings, and recently added XYZ to the US conviction list.

Core views

Deepening Cash App Growth Logic: Although Borrow business growth has slowed from its peak, it continues to grow steadily through increased user penetration (currently covering only about 25 million out of 59 million active users) and product innovation (such as six-cycle loans). New engines include Cash App Green (deepening cross-selling between spending and lending), the Neighborhoods program (converting Square terminals into Cash App acquisition channels, with Portland pilots showing 50% of new users converted from monthly active users), and physical payment hardware (e.g., waterproof chip devices supporting multi-account binding). Fully burdened gross margin (after deducting credit losses) is expected to accelerate, primarily due to declining Borrow loss rates as users mature, improved Square gross margins, and the fading impact of cash deposit/ATM fee adjustments. Square Distribution Drives Exceeding GMV Expectations: Through expansion of the direct sales team (significantly hiring in the second half of 2025) and partnerships with third-party sales organizations (ISOs), NVA (new volume) growth in the U.S. market is expected to accelerate significantly in 2026-2027. In international markets, deployment of on-site sales teams in countries like the UK, Australia, and Canada has driven NVA growth to 71%, projected to contribute approximately 11% to overall NVA by 2028. Models indicate that current market GMV expectations are too low and do not fully reflect accelerated customer acquisition; under an optimistic scenario, there is 4 percentage points of upside potential for payment volume in 2027. Clear Path for Margin Improvement: Recent workforce reductions of 40% yielded annualized cost savings of $800-900 million, part of which was reinvested into AI tools (e.g., Manager Bot leveraging open-source large models to reduce token costs) and high-ROI sales roles. Operating profit margin is expected to improve in the mid-single digits in 2026 and reach high-single to low-double digits in 2027. Pressure from rising hardware costs (e.g., memory) is mitigated by direct supply chain sourcing (partnerships with Micron and TSMC), and the gap between gross margin and GMV growth is expected to narrow in the second half of 2026.

Analysis framework

Goldman Sachs adopts a multi-dimensional analysis framework: 1) Decomposing Square growth sources using the NVA (new volume) metric, analogizing to software industry ARR logic to quantify contributions from direct and ISO channels; 2) Building a fully burdened gross margin model, adjusting for credit losses to reflect actual cash flow generation capability; 3) Conducting cost-benefit analysis, calculating savings across product, sales, and administrative functions based on layoff disclosures and estimating reinvestment impacts using Salesforce AI cost data; 4) Anchoring valuation to 2027 expected EPS, applying a 17x PE multiple (lower than the current 29x PE for 2025), reflecting the pricing logic for continued profitable compound growth.

Methodology notes

• Industry/Industrial Analysis Framework

  NVA (New Volume) Analysis

  Analogizes annualized GPV of new merchants to the software industry's ARR metric to quantify the actual contribution of distribution expansion, helping investors distinguish between organic growth and channel-driven growth.

• Valuation MethodologyPE/PEG valuation

  PE/PEG Valuation

  Applies a 17x PE multiple based on 2027 expected EPS, lower than short-term valuation multiples, reflecting the logic of pricing for sustained profitable compound growth.

• Company Fundamentals and Financial FrameworkProfit Quality Analysis

  Fully Burdened Gross Margin Analysis

  Gross margin adjusted for credit losses more accurately reflects business cash flow generation capabilities, preventing apparent growth from masking risks.

• Company Fundamentals and Financial FrameworkOperating/Financial Leverage Analysis

  Balance of Cost Savings and Reinvestment

  Part of cost savings from layoffs is reinvested into high-ROI areas (e.g., AI, sales), maintaining growth momentum while controlling expenses.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Block Inc. (XYZ.US)

  Direct beneficiary; core vehicle for ecosystem synergies and distribution expansion

  Strengths

  Bidirectional traffic capability between Cash App and Square, AI tools for cost reduction and efficiency gains, direct supply chain sourcing alleviating hardware cost pressures

  Weaknesses

  Slowing growth in lending business, rising hardware costs, execution risks in international expansion

  Comparison

  Compared to peers like PayPal and Fiserv, Block holds advantages in young user penetration and ecosystem integration

  Risks

  Deterioration of macroeconomic environment, intensified competition, unfavorable regulatory changes

Key data

• Target Price$95Based on 17x 2027 expected P/E
• 2027 Expected P/E17xCurrent 2025 expected P/E is 29x
• Square NVA Growth Rate71% (International)Data disclosed at 2025 Investor Day
• Layoff Ratio40%Yields annualized cost savings of $800-900 million
• Neighborhoods Pilot Conversion Rate50%Monthly active user conversion rate for new users in the Portland market
• Fully Burdened Gross Margin Growth14%-18% (2026-2027)Accelerates after deducting credit losses

Impact & implications

The report believes that Block's ecosystem synergies (bidirectional traffic between Cash App and Square) will enhance customer lifetime value, distribution expansion will accelerate GMV growth, and combined with margin improvement, will support profitable compound growth. For the industry, innovations in physical payment hardware (e.g., chip devices) may open new low customer acquisition cost channels, and embedding AI tools into merchant workflows could become a differentiator for payment platforms.

Risks

• Deteriorating macroeconomic environment affecting consumer and merchant transactions
• Intensified competition in the payment industry compressing margins
• Unfavorable regulatory policy changes (e.g., restrictions on lending businesses)

What to watch

• Whether Square GMV growth continues to exceed expectations
• Contribution share of Cash App non-lending businesses (Green, Neighborhoods)
• Progress of margin improvement post-layoffs and efficiency of reinvestment