Block Inc (NYSE:SQ) shares were trading lower after Morgan Stanley analyst James Faucette downgraded the stock from Equal-Weight to Underweight and lowered its price target from $62 to $60.

Benchmark analyst Mark Palmer reiterated a Buy rating on Block while raising his price target to $99 from $89.

While Block's share price has risen by more than 21% since the company reported better-than-expected fourth-quarter 2023 results on Feb. 22, a span during which the S&P 500 appreciated by 3.4%, Palmer considered that rally as an adjustment of the stock's valuation to reflect the evolution of the company's platform, rather than as a too-far-too-soon move.

Block's fourth-quarter 2023 print affirmed management's newfound focus on profitability and achieving the "Rule of 40" — gross profit growth plus adjusted operating income margin — in 2026.

Meanwhile, Block used its fourth-quarter 2023 shareholder letter to flag a significant shift in the company's strategy; it would be redirecting investments away from the pursuit of growth in international markets and toward banking products on Cash App as part of a redoubled effort to position the app to serve as the primary bank account for many more of its users.

Since Block announced its strategic shift, Palmer heard skeptics point out that payments/technology stocks command higher multiples than ones whose earnings have bank-like characteristics. At the same time, some observers believed Block's positioning of Cash App as a "neobank" is driving it into a crowded space with high customer acquisition costs (CAC) that serve as headwinds to profitability.

The analyst did note it was essential to recognize the differences between Cash App and other neobanks, as well as the unique advantages Block has relative to alternatives as it pursued a "bank the base" strategy focused on persuading a more significant portion of the Cash App's 56 million monthly active users (MAUs) as of fourth-quarter 2023 to deposit their paychecks onto the app directly and adopt the Cash App debit card.

While ~40% of the app's MAUs had adopted the debit card as of fourth-quarter 2023, only ~3% of its MAUs were directly depositing their paychecks into their accounts.

While other neobanks seek to attract new users through various forms of marketing that translate into high CAC, Cash App has the advantage of being able to use email or text to pitch its substantial existing base of users on the benefits they would gain by becoming payroll direct depositors/debit card holders at virtually no cost.

Meanwhile, Cash App recently expanded its growing suite of banking products (Cash Card, Borrow, early wage access) by launching free overdraft coverage and a 4.5% yield on savings balances for paycheck direct deposit activities.

Block gained 86% in stock value in the past six months. Investors can gain exposure to the stock via ARK Fintech Innovation ETF (NYSE:ARKF) and ARK Next Generation Internet ETF (NYSE:ARKW).

SQ Price Action: Block shares traded lower by 4.52% at $75.90 on the last check Thursday.

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