Here’s why Block (SQ) is a new best stock idea at Bernstein

Investing.com -- Block Inc (NYSE:SQ), formerly known as Square, is a new best idea at Bernstein. In a Wednesday note, the investment firm highlighted several catalysts that could drive the company's growth through 2025.

Bernstein projects a significant acceleration in Square's Gross Payment Volume (GPV) and an approximate 30% increase in EBITDA due to continued efficiency gains. The analysis also suggests a lower likelihood of regulatory scrutiny and the potential for inclusion in the S&P index.

The SPV acceleration is expected due to three factors, Bernstein notes, including “1) lessening drag from same-store sales weakness 2) recent product enhancements e.g., single app, orders migration and improved onboarding flow, and 3) development of a new distribution muscle as evident in recent partnerships.”

Moreover, Bernstein's bullishness is partly based on the expectation that Square will overcome current stagnation in key metrics related to its Cash App, such as user growth and monetization rates.

The firm foresees a mid-teens gross profit growth into 2025, spurred by initiatives aimed at increasing direct deposit penetration and expanding borrowing and commerce services.

Also, the company's focus on operational efficiency and a cap on headcount is expected to result in approximately 50% growth in adjusted operating income in 2025.

Lastly, Bernstein identifies the company's venture into bitcoin mining hardware as an underappreciated factor that could significantly contribute to medium and long-term operating income growth.

“We believe a bigger deal emerging from the success of this initiative is around multiple expansion as SQ gets back its halo around innovation and ability to create new businesses,” analysts led by Harshita Rawat noted.

On valuation, Bernstein analysts see it as “deeply attractive,” with a 26x GAAP price-to-earnings (P/E) ratio projected for 2026.

“15% of market cap is cash, and we expect a further $3-3.5B cash flow generation (~6% of market cap) through 2025 end,” analysts highlight.

The company has also initiated a buyback authorization, with about $3 billion remaining, which could positively impact shareholder value.