Q4 2025: Block’s Rally Is Catalyst-Driven, Not Moat-Driven; Downgrading to Hold Following 28% Price Appreciation Since Initial Coverage; TP $71

Q4 2025 Commentary

1. Mixed Segment Performance and Revisions. Block delivered FY2025 gross profit of $10 billion, largely in line with expectations, alongside steady operating profit margins. However, beneath the surface, the legacy Square business is showing distinct weakness. Mid-market expansion has slowed, and the lower-market segment experienced a negative contraction in Q4 2025 for the first time since Q1 2021. Conversely, accelerating inflows and an increase in primary banking active users drove explosive growth in Financial Solutions, which surged 31% YoY in 2025.

2. Upgraded 2026 Guidance. Management raised its outlook, now forecasting $12.2 billion in gross profit for 2026, coming in comfortably ahead of our $11.5 billion estimate.​

3. Model Adjustments. Keeping the key thesis but updated the model to reflect slightly faster growth in the Cash App ecosystem. This is offset by more conservative penetration rate assumptions for Square in the mid-to-lower markets. Upmarket merchant acquisition remains the primary growth driver for the Square segment moving forward.

4. Valuation and Rating Update. Updating 2026 target price to $71. However, following a 28% appreciation in the share price since the initial coverage, I am downgrading the stock from Buy to Neutral. The current valuation adequately prices in the near-term upside.

5. Workforce Reduction and AI Catalyst. I think shares surged 20%+ pre-market was a mix of (1) an “AI-agent” sentiment reversal and (2) the announcement of a ~40% workforce reduction tied to an AI-driven push to run leaner operations. Personally I take a conservative stance on sustainable cost savings: the people retained are likely higher-leverage, high-demand operators, and the added managerial/engineering burden of deploying AI at scale can offset part of the headline opex benefit.

6. More importantly, I think the market is underweighting a potential demand-side second-order effect: if the “rich get richer” dynamic persists—i.e., incremental income gains accrue disproportionately to high earners—this does not necessarily benefit Block’s core profit pools, which are largely tied to broad-based consumer transaction intensity and SMB payment volumes rather than high-income discretionary upgrades. In that world, the economy can look “fine” in aggregate while the marginal customer becomes more stressed, which can compress payment frequency, ticket sizes, and seller throughput right where Block is most exposed.