Block, Inc. (formerly Square, Inc.) is a fintech company that provides payment processing, banking, and financial services for businesses and individuals. It was founded by Jack Dorsey, Twitter’s co-founder, and Jim McKelvey in 2009. In an interesting “light bulb” style moment, McKelvey came up with the idea for Block when he, as a glassblowing artist, lost a sale because he couldn’t accept a credit card payment – he is now a tech billionaire! XYZ is famous locally for swallowing up Australian BNPL giant Afterpay (APT) in January 2022 for $US29 billion, an all-stock deal that left many local investors holding Block (XYZ) – CDI’s, which were subsequently listed on the ASX:
For subscribers not familiar with XYZ, it now has five key segments of the business:
- Seller (formerly Square) – Payment processing solutions for small and large businesses, including point-of-sale (POS) systems, online payments, and business loans.
- Cash App – A peer-to-peer payment app that allows users to send money, invest in stocks and Bitcoin, and manage finances.
- Afterpay – A “buy now, pay later” (BNPL) service acquired by Block to expand its consumer finance offerings.
- TIDAL – A music streaming service providing high-quality audio and artist-friendly revenue models – an area it’s scaling back due to the dominance of Spotify.
- Bitcoin & Blockchain Initiatives—Block has been heavily involved in Bitcoin development through its TBD platform and Spiral, working on decentralised finance (DeFi) and open-source blockchain technology.
Clearly, these are cutting edge areas, and it may be new ground for some members, however, when we think about the future of payments and the role of crypto currency within them, we think Block is likely to remain at the cutting edge.
In terms of Bitcoin, the company is focused on “making it more accessible,” which it does through the Cash App. I also holds a lot of Bitcoin directly, worth around $US800mn. Block is arguably a solid stock for potential further upside to the crypto space in the years ahead.
The BNPL space has been challenging in recent years, but Block (XYZ) and Zip (ZIP) have returned to life in the last 18 months. In November, Block announced revenue of almost $US6bn and EPS of 88c, but after rallying strongly into the result, the shares have consolidated gains over the last 3 months. We felt there were some encouraging trends in the previous quarter’s report, especially for a growth company trading on 29x:
- The Cash App business, the company’s popular mobile payment platform, reported $1.31 billion in gross profit, a 21% year-over-year jump. The monthly active users of its Cash App Card increased 11% from a year earlier to more than 24 million.
- XYZ’s lending products increasingly use AI to enable smarter and faster decisions and to help Block manage the risk of consumers and small businesses. This has allowed the company to maintain low loss rates across its products, e.g., only ~1% on BNPL.
Like many tech companies, a renewed focus on costs without impacting revenue has led to greater earnings, and if we look 2-years out, Block is trading on 16x consensus earnings, which is attractive for the growth they are delivering, and the optionality they have within payments (& Crypto). We are adding XYZ to our Hitlist ahead of their FY24 earnings on Friday.
- While this is a higher risk idea, we view it as a fairly sensible way to invest in the future of payments, digital or otherwise.
