Block: Great Potential, No Clarity

Update

Important SQ 0.00%↑ has been added to the the list of Active Deep Dive Updates. I will be writing updates on Block biannually.

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Edited by Brian Birnbaum and an update of my Block deep dive.

In Section 1.0 I review the thesis.

In Section 2.0 I discuss why I do not like the management team.

In Section 3.0 I analyze the platform´s impressive growth YoY.

In Section 4.0 I analyze the financials. 

In Section 5.0, I conclude the update.

1.0 Thesis Recap

Block has the potential to become one of the world’s largest financial institutions over the coming decade(s). But, despite my positive impression of the organization, my view of management has deteriorated.

In my previous Block deep dive I noted how Square was becoming a hyper-growth fintech distribution machine by connecting its two primary ecosystems

1. Sellers (Square)

2. Individuals (CashApp)

I also explained how the successful combination of these ecosystems has the potential to enable Block to distribute any consumer-focused financial product at a marginal cost. In commercial finance, as in most spaces, distribution is 90% of the game.

To connect the two ecosystems, Block bought the buy now, pay later (BNPL) company Afterpay for $29B in stock last year. By enabling consumers to buy now and pay later, Afterpay in theory would lure consumers in the CashApp environment to purchase from Square merchants. Almost a year after writing the deep dive, a fundamental issue remains: if Block manages to connect its two ecosystems via Afterpay, it can result in a giant toxic debt-generation machine.

This wouldn’t happen under proper management. Yet, despite my initial positive impression, since I wrote my deep dive I have developed serious concerns about the quality of Blocks´s management. Q2 2023’s earning results have only magnified my concerns.

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