(Reuters) -Shares of fintech Block fell 14.5% in premarket trading on Friday, as investors balked at profit growth lagging volume increase at its payments unit, Square.
Gross payments volume for Square, which provides payments solutions to small- and medium-sized businesses, grew 12% in the third quarter from a year ago, matching levels last seen over two years earlier.
But gross profit growth slowed to 9.22% in the quarter ended September 30, fueling investor concerns over balancing profitability with scale.
“We’ve generally seen a renewed focus on profitability over growth among investors,” analysts at brokerage Morgan Stanley wrote in a note.
They added that investors are prioritizing understanding Block’s “path to consistently delivering Rule of 40-plus.”
The Rule of 40-plus requires the percentages of revenue growth rate and profit margin to add up to at least forty.
“We believe Square’s performance drives the stock, as it is viewed as the higher-multiple business compared to Cash App, and the details there fell a bit short of expectations,” said analysts at Truist Securities.
As the equities markets hover near record highs, the U.S. consumer as well as small and medium businesses have started to show signs of weakness, prompting concerns across Wall Street over credit quality in the lower-income segment.
Block’s transaction, loan, and consumer receivable losses rose 89% in the quarter to $363.5 million.
The losses were driven by higher borrowings in the Cash App, which could make investors sensitive, given additional balance sheet risk, analysts at RBC Capital Markets said.
(Reporting by Ateev Bhandari in Bengaluru; Editing by Sahal Muhammed)
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