Be The Investor ResearchBlock's Cheap Multiple Depends on Credit Losses Slowing
Block's earnings forecasts rose as its valuation fell, creating an apparent bargain. The discount is justified unless margin gains survive slower Cash App lending and rising consumer-credit losses.
Block entered its third-quarter report with an unusual split: analysts had raised earnings forecasts while the stock's forward valuation fell. The gap can close in shareholders' favor, but only if higher margins are not being purchased with greater credit risk.
In the second quarter, Block generated $3.17 billion of gross profit, up 25%, and adjusted operating income of $864 million. Management raised its 2026 adjusted earnings outlook to $4.02 per share and guided to third-quarter gross profit of $3.13 billion, adjusted operating income of $875 million and adjusted earnings of $1.02 per share.
Cost cuts helped. Adjusted operating income reached 27% of gross profit in the second quarter. Yet reported results also carried restructuring costs and a Justice Department accrual, so investors should compare adjusted progress with GAAP operating income and cash generation.
The main risk sits in Cash App lending. Consumer lending originations rose 59% to $18.9 billion in the second quarter, while transaction, loan and consumer-receivable losses nearly doubled to $585 million. That loss expense equaled about 18% of gross profit, up from 12% a year earlier in the source analysis.
A forward earnings multiple near 17 times can look inexpensive relative to Block's recent history. It is only inexpensive if the earnings denominator holds. Longer-duration loans, slower origination growth or worsening borrower performance could force analysts to reduce 2027 and 2028 estimates even if 2026 guidance is met.
The quarter therefore has three separate tests. Gross profit must meet or beat the $3.13 billion guide. Adjusted operating income must show that the cost structure is genuinely leaner. Most important, loss expense must grow more slowly than gross profit.
Block's discount may reflect excessive pessimism, but the market is not ignoring growth without reason. The company is increasingly using credit to deepen Cash App engagement. That can lift revenue and retention, while also making the earnings stream more sensitive to borrower health.
If credit costs stabilize, the cheaper multiple and higher forecasts can coexist. If losses keep rising, the valuation is warning that today's earnings are less durable than they appear.