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Macquarie analyst Wei Sim slashed the rating on Block (NYSE:SQ) shares to Neutral from Outperform as he sees risk to EBITDA estimates.
The analyst projects that the fintech company will experience “near-term share-price pressure from consensus EBITDA downgrades”.
The current Street consensus has “underestimated operating costs, leading to an overestimation of Adjusted EBITDA,” Sim further added. The firm’s new FY22e EBITDA estimates are now sitting 6% below consensus.
“Beyond earnings downgrades, we see the risk of multiple contraction. Block’s average EV/EBITDA multiple since listing is 68× 1-yr forward; however, when excluding the period from 2020 onwards, where valuations were driven by 0% interest rates, in our view, the average 1-yr forward multiple was 24% lower, at only 51×. Given a shift away from unprofitable tech, we think multiples will refocus from sales-based to EBITDA based, and multiples below the ones seen from 2020s onwards will become the new norm,” Sim added in a client note.
Despite the downgrade call, the analyst remains bullish on Block’s long-term thesis.
“We forecast for EBITDA margins to trough in FY22 post Afterpay integration before seeing a gradual recovery from FY23 onwards. We do not forecast for EBITDA margins to exceed FY21 levels until FY26,” Sim added.
Block is due to report Q2 results on August 05.
SQ stock price is down 1.2% in pre-open Tuesday.
