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The Ratings Game: Block has ‘enormous potential’ but is bogged down by focus on bitcoin, analyst says in downgrade

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Is Block Inc. suffering from creative block?

That seems to be a takeaway from a Mizuho note Thursday, as analyst Dan Dolev downgraded shares of the Square parent company and suggested that executives at Block
SQ,
-5.21%

were focusing on the wrong things.

“After years of rightfully being deemed the most innovative name in payments, we believe user fatigue, plateauing inflows, loss of the best-of-breed POS [point-of-sale] status, and BNPL [buy-now-pay-later] misexecution are blocking SQ’s growth,” Dolev wrote in his research note, while lowering his rating on Block’s stock to neutral from buy.

Block “still has enormous potential” in his view, but he doesn’t think it’s doing enough to take advantage of its opportunities. The company acquired Afterpay earlier this year, but Dolev noted that estimates for buy-now-pay-later “continue to come down.” Additionally, while bitcoin
BTCUSD,
+0.47%

contributes to less than 5% of Block’s gross profit, projects related to the cryptocurrency “seem to disproportionately preoccupy management’s attention,” Dolev said.

“Assessing the stock’s behavior shows it closely tracks bitcoin,” he wrote. “This is unfortunate as it distracts both management and investors from focusing on SQ’s broader ecosystem.”

Read: These companies hopped on the crypto train when times were booming. Which are exposed in a downturn?

Dolev is worried about other factors as well, including a recent slowdown in net additions. The slowing net-add growth comes even as customer-acquisition costs are rising, he said.

Dolev’s downgrade follows one from SMBC Nikko Securities America analyst Andrew Bauch, who lowered his rating on the stock a day earlier. Bauch said that investors may overlook “second derivative” elements of the company’s bitcoin-trading feature, such as the impact of the crypto feature on inflows.

He suggested that Block might have benefited when bitcoin prices were rising, as a Cash App user’s eventual sale of bitcoin could have resulted in inflows into the app that could have been monetized in other ways. “Unfortunately, now that the price of bitcoin is ~70% off its highs, we suspect the inverse dynamic is underway,” he wrote.

Block shares were off 3.3% in Wednesday’s session and down another 4.6% in Thursday morning trading.

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