According to Allied Market Research, the fintech market is to have an expected value of $698.48 billion (£621.38 billion) by 2030. With continued ground-breaking ideas by new startups trying to earn their space in the market, it has given consumers the expectation for faster and more personalised experiences. With the market showing continual growth, investors can expect to achieve significant returns if they put their money in the right company.
When looking into investments of any kind during this market downturn, it is exceptionally important to understand the company. Looking into competitive advantages, history, size, and operation are all crucial for a responsible investment. With this in mind, Maxim Manturov, Head of Investment Advice at Freedom Finance Europe, provides his insight into Block Inc. and outlines whether retail investors should look to it as a safe investment.
The company
Block, Inc. (SQ) is a fintech company that enables merchants to accept card payments and provides them with reports and analytics within the Square segment. The San Diego based company, which was founded by Twitter co-founders Jack Dorsey and James McKelvey in 2009, provides an ecosystem of financial products and services to help users manage their money.
Block’s stock has lost more than 76% of its market value in the past six months due to a decline in investor appetite for riskier assets. However, as the cashless market grows, it acts as a natural growth driver for Block, as all of its solutions are cashless transactions. The recent acquisition of Afterpay will also provide Block with additional potential, both through significant growth in the Buy Now Pay Later (BNPL) market and through the addition of a Cash App customer base.
By integrating Afterpay into the Cash App, the company can gather large amounts of data on consumer habits and preferences to use to reach the advertising market. Furthermore, Block has a high growth rate and unlike other fintech companies, generates positive cash flow and has a strong balance sheet. According to the Wall Street consensus, Block trades at a substantial discount to fair market value.
Market potential
Coins and banknotes are quickly becoming the currency of the past as more and more people are beginning to favour digital payment methods. According to the Smithers report, non-cash payments are expected to grow at a compound annual growth rate (CAGR) of 10.5%, reaching $1.22 trillion (£1.08 trillion) in 2024 and $1.96 trillion(£1.74 trillion) by the end of 2029.
As part of the Square segment, the company provides its customers with hardware, including point-of-sale terminals, magnetic stripe readers, and universal terminals, as well as software for processing online payments. Block’s solutions, therefore, enable both offline and online transactions to be processed.
Following the Afterpay takeover, Block entered the young and promising BNPL market. According to Precedence Research, the value of the global BNPL market is $125.1 billion (£1.11 billion) of which 30% is in the US. The market is expected to grow at a compound annual growth rate of 43.8% to exceed $3.3 trillion (£2.93 trillion) by the end of 2030. Thus, the growing favour for cashless payments is a natural tailwind for Block as all its solutions are cashless transactions in one way or another. The acquisition of Afterpay has provided Block with an additional revenue driver through the service itself, significant growth of the BNPL market, and the continued growth of the Cash App customer base.
New growth points
The last reporting period showed several trends that could positively impact Block’s financial performance in the long term. Firstly, there has been steady growth in the company’s overseas markets. In the first six months of 2022, 44 new products were launched internationally and the gross margin in the Square segment outside the US was 13%, up from 8% a year earlier.
By comparison, PayPal’s international revenue share is 49%, clearly demonstrating Block’s global potential. Square for Restaurants software has also contributed significantly to the company’s financial performance. The software includes spreadsheet and order management, a kitchen display system, and revenue and expense reports. For the first half of 2022, the gross payment volume from Square for Restaurants more than doubled compared to last year.
The trend is likely to continue due to the recovery of the catering industry following the removal of pandemic-related restrictions. During the last conference call, Block executives revealed plans to integrate Afterpay into the Cash App, the app will receive an update allowing shoppers to find stores for online and offline purchases. The Cash App will integrate 144,000 merchants that have previously worked with Afterpay, which will open significant opportunities for Block. The company can gather large data sets about consumer habits and preferences and use them to better target potential customers. In this way, the company can open up a large market for advertising and gain an additional source of revenue.