Company Reports

We think Block’s legacy Square business model, characterized by efficient client onboarding, innovative point-of-sale devices, flat fees, and an internally developed and integrated set of software solutions, allows the company to reach and retain micro merchants that are unviable for other acquirers. In essence, we believe Square's initial success came largely from expanding the acquiring market, as opposed to stealing material share from existing players.

We think Block finished the year on a strong note. While growth for Cash App slowed sequentially, we think improving profitability is more important than growth at the moment, and results were positive on this front. We will maintain our $83 fair value estimate for the narrow-moat company. We see shares as undervalued but would stress our Morningstar Uncertainty Rating of Very High.

We think third-quarter results for Block were solid, but not overly impressive. We are more encouraged by management’s comments and its willingness to lay out some longer-term financial targets. While CEO Jack Dorsey has talked about greater discipline when it comes to profitability, we’ve seen little actual progress and we like that the company is now providing discrete profitability targets. We will maintain our $83 fair value estimate for the narrow-moat company. We see shares as materially undervalued but would stress our Morningstar Uncertainty Rating of Very High.

We think Block’s legacy Square business model, characterized by efficient client onboarding, innovative point-of-sale devices, flat fees, and an internally developed and integrated set of software solutions, allows the company to reach and retain micro merchants that are unviable for other acquirers. In essence, we believe Square's initial success came largely from expanding the acquiring market, as opposed to stealing material share from existing players.

Block is a fast-growing, highly scalable business, which creates a wide range of future possibilities. This consideration is the primary factor behind our Very High uncertainty rating. After reassessing our assumptions in light of the company's recent performance, we think it is appropriate to lower our long-term margin assumptions given the lack of improvement in profitability. As a result, we are reducing our fair value estimate for Block to $83 per share from $98. We will maintain our narrow moat rating.

Block produced solid second-quarter results that we believe showed that the company is tracking in the right direction. We will maintain our USD 98 (AUD 147) per share fair value estimates for the narrow-moat company. We see shares as undervalued at the moment, but would highlight our Morningstar Uncertainty Rating of Very High.

Block continues to see strong growth, with overall net revenue up 26% year over year. However, we would like to see this growth translate into better profitability. On this front, the quarter suggested some modest improvement. Overall, though, we don’t see anything in the quarter that would materially alter our long-term view and will maintain our $98 fair value estimate for the narrow-moat company. We see shares as undervalued but would stress our Morningstar Very High Uncertainty Rating.

We think Block’s business model on the merchant side, characterized by efficient client onboarding, innovative point-of-sale devices, flat fees, and an internally developed and integrated set of software solutions, allows the company to reach and retain micro merchants that are unviable for other acquirers. In essence, we believe Square's initial success came largely from expanding the acquiring market, as opposed to stealing material share from existing players.

Short-seller Hindenburg Research released a report detailing its claims that Block is materially overvalued. The report makes a number of claims, but in our view the primary claim is that the Cash App business has been built largely through fraud. We have reviewed Hindenburg's claims and find them largely anecdotal. That said, we would reiterate our Very High Morningstar Uncertainty Rating for Block. One of the key drivers of that uncertainty is the Cash App business. We think the long-term economics of this business are very difficult to predict, and that a significant factor is that the regulatory framework for the P2P space is far from settled. Some of the issues raised by Hindenburg could prompt a regulatory response. We will maintain our $104 fair value estimate and narrow-moat rating.

Narrow-moat Block continued to show its ability to generate strong top-line growth in the fourth quarter, but historically the company has struggled to turn this growth into better profitability. Results this quarter and management’s guidance for 2023 suggest that this will remain the case in the near term, although management outlined a framework to assess and improve long-term profitability on its call. We will maintain our $104 fair value estimate. We believe shares are undervalued but would stress our Morningstar Very High Uncertainty Rating.

We think Block’s business model on the merchant side, characterized by efficient client onboarding, innovative point-of-sale devices, flat fees, and an internally developed and integrated set of software solutions, allows the company to reach and retain micro merchants that are unviable for other acquirers. In essence, we believe Square's initial success came largely from expanding the acquiring market, as opposed to stealing material share from existing players.

Block saw strong growth and narrowed its operating loss sequentially during the third quarter. We will maintain our $104 per-share fair value estimate and narrow moat rating. While we believe shares are undervalued, we stress our Morningstar Very High Uncertainty Rating.

Block saw its growth decelerate a bit in the second quarter, but it remains strong in an absolute sense. We think the longer-term growth opportunities for the business remain considerable, but we are impatient to see this growth translated into better profitability. We will maintain our $104 fair value estimate.

We are lowering our fair value estimate for narrow-moat Block to $104 from $124 per share. After reassessing our assumptions, we are lowering our long-term margin assumptions, as we have been disappointed by the lack of progress on this front recently. Our fair value estimate equates to 62.9 times adjusted 2023 earnings. While shares appear undervalued, we would highlight our very high uncertainty rating. Block is a fast-growing, potentially highly scalable business, which creates a wide range of possibilities.

We think Block’s business model on the merchant side, characterized by efficient client onboarding, innovative point-of-sale devices, flat fees, and an internally developed and integrated set of software solutions, allows the company to reach and retain micro merchants that are unviable for other acquirers. In essence, we believe Square's initial success came largely from expanding the acquiring market, as opposed to stealing material share from existing players.

Narrow-moat Block continues to see strong underlying growth across its segments. Reported revenue declined year over year because of a fall-off in Bitcoin revenue (which is effectively a pass-through item, in our view). However, excluding Bitcoin revenue and the Afterpay acquisition, overall net revenue increased 36% year over year. While we remain impressed by Block's growth, we also remain concerned about the lack of traction on the bottom line. We will maintain our $124 fair value estimate, but would reiterate our very high uncertainty rating.

We think Block’s business model on the merchant side, characterized by efficient client onboarding, innovative point-of-sale devices, flat fees, and an internally developed and integrated set of software solutions, allows the company to reach and retain micro merchants that are unviable for other acquirers. In essence, we believe Square's success has largely come from expanding the acquiring market, as opposed to stealing material share from existing players.

Block delivered strong growth in the fourth quarter, with overall revenue increasing 29% year over year. Block continues to build out its Cash App business, and its Square operations are bouncing back from the pandemic. While the company’s top-line performance remains impressive, translating that growth into better profitability remains an issue. We will maintain our $115 fair value estimate and narrow moat rating. While the stock looks somewhat undervalued at the moment, we would caution that we believe very high uncertainty surrounds the company.

There are reports that Apple is about to unveil a service that will allow merchants to accept payments on their iPhones, without the need for additional hardware. At this point, we don’t have details on the service, which makes it difficult to fully assess the impact on competitive dynamics in the space, but within our coverage, Square looks like the company that would potentially be most impacted. Square got its start serving micromerchants that were too small for traditional providers, and this service would likely be focused on this level of merchant. However, over time, Square has moved up market, and merchants with less than $125,000 in annual volume made up only about one third of its merchant payment volume in the last quarter. Additionally, Square’s merchant offering is more expansive than just payment acceptance. We will maintain our $115 fair value estimate and narrow moat rating.

Square recently changed its name to Block. Block will be the new name for the corporate entity, but the company’s merchant business will retain the Square brand and Cash App will retain its name.