Block has two distinct sides
Orthman explains the long-term case for Block like this. The business has two distinct sides: the Seller business, which allows merchants to accept and manage payments, borrow money and run the financial side of their businesses; and the Cash App business, which allows consumers to transfer, spend and invest their money.
These are services that traditional banks have long supplied, but Square has been able to attract a generation of younger consumers and tech-savvy small businesses who are prepared to make payments outside the traditional system. It has 4 million merchants and 40 million Cash App active users on its platform.
“There is a structural shift going on in payments more broadly because of the changing behaviour of the next generation. That is real, and that is permanent,” Orthman says. “As the Millennials and Gen Z spend more, that will drive that spend to these more modern offerings.”
Orthman sees two key growth drivers for Block. The first is increasing user numbers on both sides of the business. “We believe that the addressable markets are about 50 million businesses that can actually benefit from coming online and using their readers in a simple way and transacting more easily.”
The second is improved monetisation. As it prioritises growth, Block is getting about $US50 in annual revenue from each active user, but this is low compared with traditional and digital banks that reap between $US400 and $US800 per user.
“There’s a large possible opportunity as the company matures and these users become more embedded over time,” Orthman says.
His view that Afterpay can help expand both sides of Block’s business is shared by many of the Wall Street analysts who follow Block.
New York-based UBS analyst Rayna Kumar, who recently reiterated Block as her top pick for 2022, argues that by acquiring Afterpay, Block “will deepen the connection between the Seller and Cash App ecosystems, and further enhance Square’s positioning as a two-sided merchant and consumer payments network”.
Not only will the deal allow Block to give its merchants access to a buy now, pay later offering, but Afterpay’s relationships with larger retailers should help broaden Seller business away from its small business roots.
Offering Afterpay to Cash App users should help drive growth of the buy now, play later platform, but RBC’s Perlin argues it will also broaden the Cash App offering by allowing users to manage their repayments inside the app.
Further, Morgan Stanley analyst James Faucette says the Afterpay world takes Block further into the world of consumer credit, which should generate more sustainable long-term revenues than simply clipping the ticket on payments.
But even if you believe in this long-term view of Block’s prospects and the potential for Afterpay to enhance, it’s going to take a catalyst to change the stock’s current trajectory.
And recent catalysts haven’t been helpful.
While Piper Alderson sees Afterpay as offering cross-selling opportunities between the two sides of Block’s business, it said last week it was worried about what it believes is a fall in Afterpay’s share of the buy now, pay later market in the US since the Block merger was announced last August.
UBS’ Kumar says even the recent name change to Block has hurt, given it has associated the company more closely with chief executive Jack Dorsey’s personal faith in blockchain technologies and bitcoin, just as crypto prices have been crashing.
Orthman, who does not ascribe any value to Block’s bitcoin interest in his 10-year valuation of the stock, will look for signs of progress towards the company’s longterm goals in next month’s earnings update, including an update on earnings growth in the Seller and Cash App businesses, an update on Afterpay’s growth, and more detail about how Block plans to integrate Afterpay.
ASX investors curious about the big new kid on the block may similarly do well to wait and see whether it can demonstrate it doesn’t deserve to be caught in the tech sell-off that looks like it has a way to go yet