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Block (SQ) is scheduled to report results for its first fiscal quarter after the market close on May 22, with a conference call scheduled for 5:00 pm EDT. What to watch for:

PROBE: Federal prosecutors are examining financial transactions at Square and Cash App owner Block, Gretchen Morgenson of NBC News reports. Internal documents indicate Block processed crypto transactions for terrorist groups and Square processed transactions involving nations subject to economic sanctions, according to the report and two people with direct knowledge of the matter. Most of the transactions discussed with prosecutors, involving credit card transactions, dollar transfers and Bitcoin, were not reported to the government as required, a former employee said, adding that Block did not correct company processes when it was alerted to the breaches. "From the ground up, everything in the compliance section was flawed," the former employee told NBC News. "It is led by people who should not be in charge of a regulated compliance program."

Commenting on the probe, Macquarie said that anti-money laundering challenges in the fintech space are quite pervasive and in recent years have seen related fines surge. It sees more potential for fines and/or behavioral remedies for Block, like more robust oversight teams and infrastructure, as opposed to something structural like limitations on the types of business it can do. This would add some ongoing cost though, Macquarie points out. The firm keeps an Outperform rating on Block shares with a $95 price target.

On Thursday, Monness Crespi downgraded Block to Neutral from Buy and removed its prior price target, stating that the firm is taking profits given that the uncertainty of an investigation is lingering. The firm still sees upside to estimates, but reports of prosecutors at SDNY digging into internal practices at Block are "a wrench to sentiment that will likely remain a drag."

On Monday, the firm had said in a separate note that the set up for shares was favorable entering the Q1 print. Monness Crespi added that it believed Cash App should continue to drive more monetization and engagement from existing Cash Card customers increasingly using Direct Deposit and then generating interchange revenue from serving atop the wallet when users spend on Cash Card.

STREET DISAGREES ON BLOCK: Earlier this month, Morgan Stanley downgraded Block to Underweight from Equal Weight with a price target of $60, down from $62. The firm's demographic analysis suggests high market penetration and limited additional opportunity to expand banking and credit services for Block's Cash App. Meanwhile, Morgan Stanley anticipates challenges to improving Square Seller growth. The market believes that Block can rapidly expand margins, primarily through cost cuts, while driving durable high-teens gross profit growth in Cash App and reaccelerating Square Seller volume growth, the firm tells investors in a research note.

That same day, Benchmark raised the firm's price target on Block to $99 from $89 and kept a Buy rating on the shares. The firm believes Block's Q4 print provided an affirmation of management's newfound focus on profitability and on the achievement of the "Rule of 40" - gross profit growth plus adjusted operating income margin - in 2026. Benchmark cites an updated sum-of-the-parts analysis for the target increase.

Meanwhile, Mizuho raised the firm's price target on Buy-rated Block to $106 from $99. The "reinvigorated management focus" on the Cash App and Square ecosystems could potentially drive meaningful upside to the company's 2024 guidance, the firm tells investors in a research note. Mizuho says that while management guided to 15% gross profit growth, it sees potential for over 20%. The firm's "blue-sky scenario" suggests Block's profit growth could reach greater than 20% in 2024 versus the 15% guide and 16% consensus estimate. It believes moving up-market and building a next-generation social bank could drive a reacceleration in quarterly monthly active user growth.

Baird also raised the firm's price target on Block to $98 from $95, while keeping an Outperform rating on the shares. The firm expects Q1 EBITDA to beat and guidance to be likely mildly raised. Baird likes the shares into Q1 results and wouldn't be shocked to see them nicely over $100 in a year.

DIRECT DEPOSIT INFLECTION: In a pre-earnings note, Wells Fargo tweaked its model and highlighted key thoughts around the Direct Deposit opportunity for Cash App, which it views as a main catalyst to GP growth in 2024 and beyond. The firm believes the main driver for GP growth continues to be increasing inflows by growing cash card/direct deposit adoption. Wells' analysis of DDUs - Paycheck and Taxes - and inflows indicates 2%-9% potential upside to the Street FY24 Cash App GP. The firm has an Overweight rating on the shares with a price target of $95.

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