Block (XYZ) has disrupted the expensive payment processing industry by offering affordable and user-friendly solutions for small and medium businesses. 

It provides a growing ecosystem, supporting point-of-sale, online transactions, loans, and “buy now, pay later” services. 

Despite impressive performance and strong international expansion, the market is pricing in lower future profitability. 

With digital payments accelerating worldwide, Block remains well-positioned to capture further growth, offering considerable upside potential.

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For as long as payments have been processed, sellers have been beholden to a small group of companies able to impose a significant degree of pricing power upon them.

These include manufacturers of processing equipment and software like cash registers and kiosks as well as financial services companies that issue credit cards.

For most businesses, especially small and medium-sized ones, the services provided by these companies often came with costly strings attached.

If a small shop wanted to accept credit card payments from its customers, it would have to incur a substantial fee and perhaps also commit to not accepting competing cards.

This presented a serious challenge, as technological and financial developments have driven more and more consumers to ditch cash in favor of debit and credit cards.

For a company like Block (XYZ), which offers a cheaper alternative to help process payments, this provides a golden opportunity to help small businesses stop losing customers and sacrificing profit.

The company has built a strong reputation by offering digital payment services through tools like Square, Cash App, and now Afterpay.

Square caters to businesses of all sizes, helping them accept payments, manage sales, and track inventory in a seamless way. 

It has grown beyond in-person transactions by expanding into online sales, invoicing, and other tools that make life easier for merchants. 

Meanwhile, Cash App allows individuals to send money, pay bills, and now access features like small loans through Cash App Borrow. 

Together, these services make Block a commerce platform that connects buyers, sellers, and lenders.

Even though many of its solutions started in the United States, Square’s international growth has been noteworthy, with a rising share of gross payment volume with 25% year-over-year growth, substantially outpacing the domestic U.S. market’s 6.9% growth. 

International markets now account for 19% of Square’s GPV, up from 17% in the year ago coming from regions outside the U.S. 

This expansion helps diversify its customer base and lowers the company’s dependence on one market. 

As more countries embrace digital payments, Block’s established reputation can help it stand out from smaller competitors trying to gain traction in the same space.

Another critical aspect of Block’s success lies in how it continuously adds features that make life easier for users. 

For instance, adding Cash App Borrow addresses short-term lending in a more direct way than many competitors. 

While small-dollar loans come with higher risks, Block has a robust underwriting process which contributed to the Cash App’s 14% year-over-year growth. 

By leveraging its extensive user data and ongoing learning, the company can fine-tune its loan offerings to fit real consumer needs, which may strengthen loyalty in the long run.

The addition of Afterpay also increases Block’s flexibility in meeting changing shopping habits. 

“Buy now, pay later” options allow consumers to spread out purchases over several smaller payments. 

When integrated with both Square and Cash App, this offering can boost overall transaction flow while giving customers more ways to pay. 

Users who already rely on Cash App might be more inclined to take advantage of Afterpay’s installment solutions, and merchants can tap into a broader audience eager for alternative payment options.

All these factors combined enabled the company to achieve a strong 28% Uniform return on assets ”ROA” with 23% asset growth last year.

Despite this strong performance, the market appears to be overly concerned about competitive pressures in fintech and potential consumer spending weakness, reflected by Blocks’ stock trading at 13.6x Uniform P/E.

We can see what the market thinks through our Embedded Expectations Analysis (“EEA”) framework.

The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

At the current stock price, the market expects the company’s Uniform ROA to decline to around 10%.

Despite short-term concerns about consumer spending, Block’s main growth engine lies in the ongoing shift toward digital payments. 

More businesses and consumers prefer the speed and convenience of cashless transactions, and the company’s suite of tools meets that demand head-on. 

Whether it’s a local shop using Square’s point-of-sale software or a freelancer sending invoices through Square’s online tools, customers recognize the simplicity and efficiency of these products. 

Likewise, on the consumer side, Cash App and Afterpay’s solutions help users handle everyday financial tasks with minimal hassle.

Block’s robust ecosystem, expanding digital solutions, and strong financial position make it well-positioned to capitalize on the accelerating digitalization of transactions and shift toward e-commerce, offering considerable upside potential.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research