Block, Affirm price targets cut as Morgan Stanley sees a more challenging environment

Morgan Stanley analyst James Faucette lowered estimates on Block (NYSE: SQ) and Affirm Holdings (NASDAQ: AFRM) in a note on payments and procession stocks on Thursday.

Block's price target was cut slightly to $66 from $67 per share, while Affirm's share price target was moved to $46 from $52.

The analyst told investors that they are trimming estimates at the companies to reflect weakening credit forecasts and a more challenging environment for low-end consumers.

"In its 2023 outlook, the Morgan Stanley Consumer Finance team is incrementally negative on credit risk as high inflation, rising unemployment, and less excess savings drive a potential consumer cash flow squeeze," Faucette said. "Higher inflation may impact lower income consumers, in particular, who spend more of their income on food, rent, and energy. This could eat further into excess savings, which are already below pre-COVID levels for the bottom quintile of earners. Given a weakening backdrop, the Morgan Stanley Consumer Finance team forecasts loan DQs and net charge-offs to accelerate in the coming quarters."

For Affirm, Morgan Stanley expects greater consumer credit deterioration to lead to higher provision costs for Affirm, leading to lower revenue less transaction margin as a % of GMV.

For Block, the analyst explained the firm expects a modest impact on both Cash App and Afterpay.

"Cash App's exposure largely comes from lower-income consumers making up the core of Cash App's consumer base, which could pressure platform inlows. Afterpay (which represents 10% of total SQ gross profit mix) could see an impact on both its margins (given higher provisions) and it's revenue (given a tightened credit box)," Faucette wrote.

By Sam Boughedda

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