Block – Fintech catering to Consumers, Sellers, and Everything in Between

Block, Inc. (Ticker: $SQ) is the holding company that owns familiar names like Square, Cash App, Tidal, and Afterpay.

• Square offers merchants – mainly smaller ones – an integrated ecosystem of commerce solutions, business software, and banking services

• Cash App is Venmo on steroids, with augmented features like stock trading and wallets for Bitcoin

• Tidal is a music streaming platform; though smaller than Spotify and Apple Music, it has found a niche focusing on high-fidelity audio and exclusive music content

• Afterpay, acquired by Block in January 2022 for $29 billion in an all-stock transaction, is a popular Buy-Now-Pay-Later (BNPL) service that represents the largest pivot that Block has ever made in its corporate history

Looking at the company today, it is hard to imagine Block started in 2009 merely making dongles that turned smartphones into credit card readers. Co-founders Jack Dorsey and Jim McKelvey set out to help small sellers solve a point-of-sale pain point, but they have since created an intricate yet cohesive complex of hardware devices, financial services and software solutions. Today, Square is a true merchant platform: everything from website creation and slick payment terminals, to management of loyalty programs and payrolls. In addition, Block created Cash App back in 2013 during a hackathon as a mobile payment service. Through multiple product launches – including Cash App Card, Bitcoin and stock trading – Cash App grew viral at a rapid pace, resonating with the younger, more technologically savvy crowd. Profitability rose alongside since Cash App offered way more than just peer-to-peer money transfers. With 45 million monthly active users in the U.S. today, Cash App currently accounts for half of Block’s consolidated gross profits. Not bad for a product grown organically in its backyard, much like Amazon Web Services for Amazon.

Jack Dorsey: Bets Big on Afterpay

Block is still led by Jack Dorsey, who is pivoting the company further into fresh territories like Tidal (acquired in 2021), international markets, and blockchain. Perhaps his largest bet so far is Afterpay, an expensive acquisition made at the height of the recent bull market and BNPL fever. It is a bold move for Block, aiming to deepen as well as tighten its seller and consumer ecosystems further:

“Square plans to integrate Afterpay into its existing Seller and Cash App business units, enable even the smallest of merchants to offer BNPL at checkout, give Afterpay consumers the ability to manage their installment payments directly in Cash App, and give Cash App customers the ability to discover merchants and BNPL offers directly within the app”

Execution risks are numerous, not to mention added balance sheet burden of providing consumer financing on a broader scale. In the near term, there could also be a write-down of the $12 billion goodwill from Afterpay acquisition, given higher interest rates, weaker consumer sentiment, and drastic drop in peer valuations, notably of Klarna and Affirm. While writing-down of goodwill may be an accounting quirk, it is nevertheless a potential bid for negative headlines.

All things considered, Block has the essential traits of a giant in the making. Like Amazon, it has a visionary leader in Jack Dorsey who has transformed the company into a disruptive fintech with superior cost structures and economics compared to traditional incumbents. While Afterpay may seem like a profligate purchase, it may still pay off in the long run for shareholders. Much will depend on Block management as it continues to extract value from the lofty price paid. The jury is still out there on this acquisition.

(Author is long $SQ)

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