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Block's $5 Billion Bet: Genius Move or Desperate Gamble?
Block (XYZ), formerly Square, just announced a $5 billion increase to its share repurchase program, and the market's reacting like they just found free money. The stock popped 9% initially, settling around a 7.5% gain (according to Benzinga Pro data) – not exactly meme-stock levels, but a noticeable jump. Management’s also promising more financial guidance at their 2025 Investor Day. All this is being framed as a commitment to returning capital to shareholders while simultaneously investing in growth. But let's dig into the numbers, shall we?
The "Rule of 40" Mirage
The headline from Block's Investor Day is their projected achievement of the "Rule of 40" in 2026 and sustained performance through 2028. For those unfamiliar, the Rule of 40 is a quick-and-dirty metric favored by SaaS investors: revenue growth rate plus profit margin should equal or exceed 40%. It's a decent shorthand, but prone to manipulation.
Block is projecting gross profit growth in the "mid-teens" annually, reaching $15.8 billion by 2028. Adjusted operating income is slated to grow roughly 30% annually to $4.6 billion, with adjusted EPS hitting $5.50 by 2028. They're also introducing a new non-GAAP cash flow measure (always a red flag when a company invents its own metrics), expected to reach over $4 billion (25% of gross profit) by 2028.
Here's where my skepticism kicks in. "Adjusted" operating income and EPS are always suspect. What exactly are they adjusting out? Stock-based compensation? Restructuring charges? Unicorn tears? The devil's always in the details, and those details are often buried in the footnotes of their 10-K. I've looked at hundreds of these filings, and those adjustments can make a massive difference.
A 30% growth in adjusted operating income sounds great, but if stock-based compensation is also growing at 30%, then the actual cash flow available to shareholders isn't improving nearly as much. Block needs to be transparent about these adjustments.
A Thought Leap: What assumptions are baked into these projections? What discount rate are they using to calculate present value? What's their expected churn rate for Cash App users? These are the questions I'd be hammering management with on the earnings call.
Buybacks: A Confidence Signal or Financial Engineering?
The $5 billion share repurchase program is being touted as a sign of management's confidence. And, sure, it could be. But it could also be a way to prop up the stock price and offset dilution from executive stock options.
Let's say Block's shares average $65 over the next year (they closed recently around $62). $5 billion buys back roughly 77 million shares. That's a decent chunk, but it's not a game-changer, especially if they're simultaneously issuing new shares to employees. The net effect on EPS could be minimal.
A Personal Aside: This is the part of the analysis I find genuinely puzzling. Why not use that $5 billion to acquire a competitor or invest in R&D? Unless… they don't see any better opportunities. Which, if true, isn't exactly a ringing endorsement of their future prospects.
COO and CFO Amrita Ahuja emphasized "scale and efficiency." That sounds like code for "we're cutting costs." Which, again, is fine, but it's not exactly a high-growth strategy. It's a mature company strategy.
Wall Street's Verdict: A Chorus of "Moderate Buys"
The consensus among 26 Wall Street analysts is a "Moderate Buy" rating, with an average price target of $84.83, implying about 47% upside. Twenty analysts say "buy," four say "hold," and two are brave enough to say "sell."
Those price targets are based on models. And models are only as good as the assumptions that go into them. If those analysts are baking in overly optimistic growth rates or ignoring the impact of stock-based compensation, then those price targets are worthless.
So, What's the Real Story?
Block's future hinges on execution and transparency. If they can actually deliver on their projections, and if they're honest about their accounting, then the stock could be undervalued. But there are too many "ifs" for my liking. The share buyback smells a bit like financial engineering, and the "Rule of 40" is a mirage if the underlying numbers aren't solid. Proceed with caution.