Block's (XYZ) Cash App is facing monetization challenges, but Square's outperformance bolsters a positive outlook, Morgan Stanley said in a Friday note after the company reported its Q1 results.

The brokerage said Square Seller likely exceeded investor expectations on distribution progress, driving better share retention, while its field checks revealed high adoption.

Block's lower-income Cash App customers limit monetization potential and it must continue to prioritize credit expansion for double-digit profit growth, analysts said, adding that expansion of credit can support "modest" acceleration in H2.

Morgan Stanley said it adjusted its fiscal 2025 gross profit growth estimate to 12.7% from 14.1% earlier, considering higher Square gross payment volume growth of 9.2% from 7.4%. It also lowered its Cash App gross profit growth estimate to 14% from 17% earlier, after pricing in macro uncertainty and Q1 miss.

Morgan Stanley said it revised its fiscal year 2026 gross profit estimate to $11.39 billion from $11.61 billion, anticipating a 13.7% year-over-year growth.

Morgan Stanley said it reiterated its overweight rating on the stock and lowered its price target to $65 per share from $67.

Shares of Block were down 22% in recent trading.

Price: 45.57, Change: -12.91, Percent Change: -22.08