Why downgrade a business that is still growing?

  • Morgan Stanley downgraded Block from Overweight to Equal-weight and lowered its price target from 90 dollars to 80 dollars. The bank believes investors are already relatively optimistic about improvements at Square and Cash App’s credit expansion, while near-term growth and earnings expectations face greater risks.
  • The bank lowered its 2027 adjusted earnings-per-share forecast from 5.28 dollars to 5.06 dollars and cut its target price-to-earnings multiple from 17 times to 16 times, reflecting intensifying competition, loan-loss risk and potentially greater reinvestment.

How will six-week loans change Cash App’s growth?

  • Block is shifting Borrow loans from four weeks to six, with borrowing limits per customer remaining roughly unchanged during testing. Credit limits are tied up for longer, so customers may borrow fewer times each quarter, putting pressure on near-term lending volumes.
  • Against a higher year-over-year comparison base in the second half, Morgan Stanley lowered its forecasts for year-over-year consumer loan origination growth in the third and fourth quarters of 2026 from 40% and 20% to 36% and 19%, respectively.
  • The fee for a six-week loan is 7.5% of the amount lent, above the historical 5% for four-week loans. The bank expects the higher fee to offset most of the impact on gross profit from lower near-term lending volumes. As the product matures and borrowing limits increase, longer-term unit economics may also improve.

Why have earnings forecasts fallen despite higher fees?

  • Longer loan terms will also push up loss rates. Morgan Stanley expects the Borrow loss rate to rise from about 3.3% in the second quarter of 2026 to a peak of 4.5% in the fourth quarter of 2027. Even so, higher fees still give six-week loans better unit economics than the previous four-week loans, whose loss rate was about 3%.
  • The bank expects transaction and loan loss expenses to represent 24% of gross profit in 2027, up from its previous forecast of 16%. Meanwhile, margin expansion will slow after substantial efficiency gains in 2026: the forecast for adjusted earnings before interest and tax in 2027 has been lowered from 4.49 billion dollars to 4.25 billion dollars, and the margin measured against gross profit from 31.0% to 29.4%.
  • This is not a broad weakening of growth forecasts: the bank has slightly raised its forecast for company-wide gross profit growth in 2027 from 15.5% to 15.6%, but higher loss expenses have lowered its earnings forecast.

Why does Square’s improvement still require more investment?

  • Morgan Stanley acknowledges Square’s progress in building a direct sales team and expanding its channel partners. These initiatives have strengthened its ability to reach larger merchants and win transaction volume; the bank’s survey of small and medium-sized businesses also shows greater satisfaction with Square’s products among larger merchants.
  • But competition is intensifying in the in-person payments market for small and medium-sized merchants, which accounts for about 80% of Square’s total payment volume. Several rivals are competing for similar point-of-sale merchants, and Block may need to increase investment; expanding Cash App credit products and acquiring users may also bring additional costs.
  • The bank has not adjusted its Square gross profit forecast for now, but believes investors have already largely recognized recent progress and that the competitive environment limits the scope for further upside surprises.