Square's SMB strength stands out, Morgan Stanley reiterates Overweight on Block

Overview

This report is Morgan Stanley's company research on Block, Inc, centered on Square's competitiveness among SMB merchants. The report argues that proprietary SMB survey data show strong momentum for Square in merchant adoption, customer satisfaction, bundling of financial services and software, and demand for AI tools, and therefore reiterates the Overweight rating while maintaining or updating the target price to $98.

Core views

Core views include: Square is expanding the TAM of its merchant payments and software ecosystem, particularly among mid-sized merchants and in the restaurant vertical; higher attachment of financial services and software services should support gross profit growth; customer satisfaction and low switching intent indicate brand and retention advantages; AI tools could become a new demand entry point for payment providers; however, the market still needs several quarters of execution evidence to confirm that TAM expansion and margin improvement at Square and Cash App can be sustained.

Analysis framework

The report uses Morgan Stanley's proprietary survey of 274 SMBs, combined with metrics such as adoption rates, satisfaction, switching intent, verbatim customer feedback, use of financial services and software, and demand for AI tools, to assess Square's share and customer experience advantages versus competitors such as Toast, Fiserv, Clover, Shopify, and Global Payments, and maps the survey conclusions to Square's GPV, gross profit, adjusted EPS, and valuation assumptions.

Methodology notes

• Survey analysisMorgan Stanley proprietary SMB survey

  Sample of 274 SMBs

  The report uses a sample of 274 small and medium-sized business merchants to compare payment processor adoption, customer satisfaction, switching intent, attachment of financial services and software, and demand for AI tools.

• Forecast frameworkMorgan Stanley ModelWare

  Company forecasts versus consensus expectations

  The report translates the survey results into forecasts for Square FY27 gross profit, GPV, and adjusted EPS, and compares them with prior forecasts and Refinitiv consensus expectations.

• Valuation methodP/E relative valuation

  18x CY27 adjusted EPS

  The $98 target price is based on applying an 18x P/E multiple to CY27 adjusted EPS including SBC, with the multiple described as comparable to peers after adjusting for growth.

Asset mapping & comparison

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

• Block, Inc (XYZ.O)

  Covered company in the report; Square and Cash App are the core business and valuation drivers.

  Strengths

  Overweight rating, $98 target price, rising Square share, stronger bundling of financial services and software, increasing demand for AI tools, and FY27 earnings forecasts above consensus.

  Weaknesses

  The market still needs more quarters of execution validation; large-scale organizational downsizing may affect execution; some customers still complain about fees and reserve retention.

  Comparison

  Square outperforms multiple payment processing competitors in satisfaction, potential switching-in intent, and demand for AI features; traditional banks still maintain an advantage in small business lending.

  Risks

  Competition could create pricing pressure, regulatory intervention, international expansion and moving upmarket could compress margins, and slow volume ramp could limit growth.

• Square

  Block's ecosystem of merchant payments, POS, software, and financial services, and the main focus of this report.

  Strengths

  Higher adoption in the SMB survey, especially driven by mid-sized merchants and the restaurant industry; high customer satisfaction and improving attachment of financial services and software services.

  Weaknesses

  Customer feedback indicates there is still room for improvement in inventory management, fee levels, and chargeback reserve retention.

  Comparison

  Compared with Toast, Fiserv, Clover, Shopify, and Global Payments, Square stands out in satisfaction, ease of use, reliability, support, and potential switching-in intent.

  Risks

  Price competition in the payment processing industry is intense, and fee sensitivity may limit room for price increases.

• Cash App

  Block's consumer financial ecosystem; the report treats it as one of the potential upside factors.

  Strengths

  If Cash App credit products scale faster, they could accelerate revenue and user growth.

  Weaknesses

  The report's main evidence is concentrated on Square; the Cash App portion requires more follow-up operating data for validation.

  Comparison

  Unlike Square's SMB merchant momentum, Cash App's upside depends more on credit product expansion and user monetization.

  Risks

  The pace of credit product rollout, the regulatory environment, and execution quality could affect the timing of contribution.

Key data

• SMB survey sample274 companiesSample size of Morgan Stanley's proprietary SMB survey.
• Usage rate of banking-related services among Square customersabout 70%Up from about 50% last year, including debit cards, credit cards, small loans, savings accounts, and checking accounts.
• Square customer satisfaction96%Up from 83% last year and ahead of major competitors such as Toast, Fiserv, Clover, and Shopify.
• Share of Square customers who are very satisfied49%Compared with 33% for Global Payments, 44% for Toast, and 30% for Clover.
• Share of Square customers very likely to switch providers in the next 12 months7%The report says this proportion is low; Toast is 0%, and Clover is 8%.
• Preferred payment provider for AI featuresSquare 44%Square was the payment provider respondents were most likely to use for AI features.
• Demand for Square AI tools among Square customers60%60% of Square customers want to use AI tools provided by Square.
• FY27 Square gross profit growth forecast16.5%Previous forecast was 15%, and consensus was 12.5%.
• FY27 Square GPV growth forecast15.6%Previous forecast was 14%, and consensus was 12%.
• FY27 adjusted EPS forecast$5.44Previous forecast was $5.34, and consensus was $5.07.
• Target price$98Based on 18x CY27 adjusted EPS; the report says its EPS forecast is 7% above consensus.
• Medium-term growth assumptionsGross profit growth 16-17%, GPV growth 15-15.5%The report's forecast range for Square gross profit and GPV growth in 2027/2028.

Impact & implications

The report has a positive implication for Block shares: if Square continues to expand penetration among larger merchants, in the restaurant vertical, in financial services bundling, software services, and AI tools, the market's expectations for Square gross profit and Block profitability may still have room for upward revision. But investors may need more quarters of execution evidence, especially proof of TAM expansion, margin improvement, AI efficiency gains, and stable execution after organizational downsizing.

Risks

• It may take several quarters of successful execution to attract more incremental investors.
• Approximately 40% organizational downsizing may disrupt product, sales, or operational execution.
• Competition may create pricing pressure across different merchant segments.
• International expansion and moving toward higher-end merchants may compress margins, and slow volume ramp could constrain growth.
• Regulatory intervention could affect the development of payments, financial services, or credit products.
• Traditional banks still lead in small business lending, which may limit Square's monetization potential in financial services.
• Customer feedback still highlights pain points such as high fees, chargeback reserve retention, and insufficient inventory management, which may limit satisfaction and pricing power.

What to watch

• Whether Square's adoption rate, share, and potential switching-in intent continue to improve in subsequent SMB surveys.
• Whether growth among mid-sized merchants and in the restaurant vertical is sustainable without sacrificing take rate.
• Whether Square's financial services usage rate remains above about 70% and whether software services attachment continues to improve.
• The actual adoption, efficiency improvement, and monetization impact of AI tools such as SquareAI and Managerbot.
• Whether forecasts such as FY27 Square gross profit growth of 16.5%, GPV growth of 15.6%, and adjusted EPS of $5.44 are achieved.
• Whether Cash App's credit product ramp accelerates revenue and user growth.
• Whether product launches, customer support, and sales execution remain stable after organizational downsizing.
• Whether customer feedback on fees, service reliability, reserve retention, and inventory management improves.