Second-Quarter Growth and Profit Exceed Expectations; Positive View on Block's Execution and Growth Trajectory Maintained
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Second-Quarter Growth and Profit Exceed Expectations; Positive View on Block's Execution and Growth Trajectory Maintained
Morgan Stanley maintains its Overweight rating on XYZ and $90 price target, believing that improving Square growth, expanding Cash App credit, and higher margins support medium-term value, while reinvestment, competition, and credit risks warrant monitoring.
- Second-quarter Cash App gross profit grew 31% year over year, above the analysts' prior expectation of 25%; consumer loan originations increased 59% year over year.
- Square Seller Business gross profit grew 13% year over year, while U.S. GPV growth accelerated 160 basis points sequentially to 9.8%; analysts expect continued modest acceleration in the second half.
- The 2026 gross profit growth forecast was raised to 21.2%, adjusted EBIT forecast was raised to $3.45B, and adjusted EPS forecast was raised to $4.07.
- The 2027 gross profit growth forecast remains 15.5%, but the adjusted EBIT margin forecast was lowered from 32% to 31% as management is inclined to increase investment; adjusted EPS remains $5.28.
Report interpretation
Overview
The report maintains a positive view following Block's announcement of its second-quarter 2026 results. Analysts believe that improving Square payment volumes and Seller Business performance, broad-based Cash App growth across commerce, banking, and credit, and increased profitability collectively reduce market concerns regarding the company's operational execution.
Core views
Square's channel expansion, upmarket penetration, and sales momentum are expected to drive modest acceleration in GPV and gross profit in the second half. Cash App's Borrow and buy now, pay later products remain growth engines, although a high comparison base will slow consumer loan growth. Management plans to increase investment in Square sales, Cash App products, and Neighborhoods, making expectations for 2027 margin improvement more cautious.
Analysis framework
The analysis uses segment gross profit, GPV, consumer loan originations, adjusted EBIT margin, and adjusted EPS as core metrics, combined with scenario analysis and 2027 P/E valuation to determine the price target.
Methodology notes
Price Target Valuation
The $90 price target is derived by applying a 17x P/E multiple to 2027 adjusted EPS of $5.28.
Risk-Reward Assessment
The bull-case scenario is $120, corresponding to 20x 2027 adjusted EPS; the base case is $90, corresponding to 17x; and the bear case corresponds to 15x, assuming growth and margins are materially below expectations.
Growth and Profitability Tracking
Gross profit, GPV, credit originations, and margins for Square and Cash App are tracked separately to assess growth sustainability.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- XYZ.USDirectly Covered Company
- Strengths
- Improving Square channel and sales momentum, expansion of Cash App credit products, higher profitability, and greater product and pricing flexibility expand the addressable market.
- Weaknesses
- Cash App Borrow faces a high comparison base, while 2027 reinvestment slows the pace of margin expansion.
- Comparison
- The price target applies 17x 2027 adjusted EPS, which analysts view as broadly in line with growth-adjusted peer levels.
- Risks
- Pricing pressure from competition in the merchant market, margin drag from upmarket and international expansion, regulatory intervention, and credit risk.
Key data
- Second-Quarter Cash App Gross Profit Growth31%Above the analysts' prior expectation of 25%.
- Second-Quarter Consumer Loan Origination Growth59%Includes products such as BNPL and Borrow.
- Second-Quarter Square Seller Gross Profit Growth13%Year-over-year growth accelerated by 400 basis points sequentially.
- Second-Quarter U.S. GPV Growth9.8%Year-over-year growth accelerated by 160 basis points sequentially.
- 2026 Gross Profit Growth Forecast21.2%Previously 19.4%.
- 2026 Adjusted EBIT Forecast$3.45B, margin 27.5%Previously $3.38B and 27.0%.
- 2027 Gross Profit Growth Forecast15.5%Unchanged.
- 2027 Adjusted EPS Forecast$5.28Unchanged; the price target uses a 17x P/E multiple.
Impact & implications
If Square's U.S. GPV growth continues to improve, Cash App's credit products expand smoothly, and profitability remains resilient, there is room for upward revisions to market expectations and valuation. Conversely, margin pressure from management reinvestment, slower credit growth, or intensifying competition could limit valuation re-rating.
Risks
- Slowing growth in Cash App Borrow and consumer loans against a high comparison base could weaken Cash App growth.
- Competitors including Affirm, Klarna, Chime, and PayPal could intensify competition in buy now, pay later and payments.
- Expansion into higher-income merchants and international markets could reduce margins; weaker-than-expected payment volume growth could also constrain growth.
- Regulatory intervention or deteriorating credit risk could affect the Cash App business.
- Morgan Stanley has disclosed business relationships with Block, and investors should consider this report as one factor in their investment decisions.
What to watch
- Whether U.S. Square GPV growth improves toward 11% and 12% in the third and fourth quarters, respectively.
- Whether Square gross profit can grow broadly in line with GPV in the second half, along with progress in channels, field sales, and self-serve onboarding.
- Whether Cash App consumer loan originations slow to year-over-year growth of 40% and 25% in the third and fourth quarters, respectively, as expected.
- Whether Cash App gross profit growth can remain at 21% and 17% in the third and fourth quarters.
- The intensity of management investment in Square market expansion, Cash App credit products, and Neighborhoods, as well as the impact on 2027 margins.