Wells Fargo reiterates an Overweight rating on Block ahead of results, while Morgan Stanley keeps an Underweight Block (SQ) is scheduled to report results for its first fiscal quarter after the market close on May 22, with a conference call scheduled for 5:00 pm EDT. What to watch for:
REORGANIZATION HEADLINES: On Friday, Fortune's Kali Hays reported that Block CEO and cofounder Jack Dorsey is planning to restructure Block in order to remove business unit silos and group staff by function and is warning that it may feel "disruptive or uncomfortable." "We're going to reorganize our entire company by function and disband our business unit reporting structure," Dorsey said in an internal memo which was viewed by Fortune, adding that the move would take Block back "to how we started as a company." Block has previously laid off about 10% of its staff, ended performance reviews, and named a new CTO, the report notes. Dorsey says the restructuring is intended to address what he's identified as "three problems" at Block, those being "collaboration, craft and flexibility."
In a research note ahead of earnings, Wells Fargo said that while investor focus has been on Block's gross payment volume outlook/trends since reporting Q1, headlines suggesting reorganization and potential reporting changes added a wrinkle to the conversation. The firm views investor concerns on the reorganization deviating focus from new initiatives as merited, but believes much of this was already underway given management commentary on ecosystem stitching. Wells reiterates an Overweight rating on the shares with a price target of $95.
IMPROVING SQUARE EXECUTION: Last month, William Blair upgraded Block to Outperform from Market Perform without a price target. The firm said its bullish view reflects Square's improving execution, marked by simpler merchant onboarding and new vertical solutions, such as in hospitality, and CEO Jack Dorsey "injecting new energy into a business that had become complacent, despite technology leadership." In addition to streamlined merchant onboarding, Square has consolidated apps, and made it easier for merchants to accept payments through the introduction of capabilities like Tap-to-Pay on iPhone, William Blair told investors in a research note. The firm believes Block's strong operating leverage will continue and sees optionality in potential Square distribution deals. The stock should rerate higher as the Street gains comfort with the company's ability to achieve its "Rule-of-40 goal," contended Blair.
TARGET CUT: On Tuesday, Morgan Stanley lowered the firm's price target on Block to $55 from $60 and kept an Underweight rating on the shares. While the firm thinks Block can likely deliver on cost savings and a profitability beat in Q2, it also thinks it'll be harder for Block to sustain the magnitude of EBITDA outperformance seen in Q1, especially as the company faces more near-term topline headwinds amid slowing SMB spend and lower-income consumer pressure.
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