SQ // Green 8 // Strike Price = {subscribe}
7 year CAGR = 25.3%
// WHY BUY
When notorious short attackers like Hindenburg* stir up the FUD on a quality company like Block it is time to freshen up the Strike Price and take advantage of the situation. The sale will only last so long.
The short report is filled with irrelevancies like high tangible book value (Block is not an industrial co. where it would matter) and rappers with criminal history name-dropping Cash App. Two points of relevance 1) scammers sometimes use Cash App. But no social security number accounts are throttled with only small transactions. Scammers gonna scam. In a wee footnote, Hindenburg acknowledged “Block, as a money services business, is subject to the requirements of AML laws. Block does not have direct obligations under KYC laws”. 2) Card processing fees. Block is similar to PayPal in how they operate and the SEC is looking into PayPal. Perhaps one day the SEC will regulate a fee structure cap that could reduce revenue by a slice. But Block is turning into an earnings growth story from a revenue growth story and this does not seem like a thesis-changer.
Block is a quality company led by a visionary, albeit slightly enigmatic founder, that has created an innovation stack;** Cash App, a digital wallet and Square, fintech for SMBs. {Plus up-n-comers: Afterpay (buy now, pay later), Spiral (bitcoin lightning), Tidal (music streaming), etc.} Thanks to market manipulators, opportunity presents to buy this dip if Block, as a still young fintech company focused on small and medium sized businesses financial systems, digital wallets for the under-banked and bitcoin, is a company you want to own for the long-term.
* Short attackers mostly go after crappy companies (useful) but sometimes they focus on quality companies (market manipulation). They write a long, sensational report, get retailer investors to sell their stocks in fear of the FUD, collect their short fees^ and then, presumably, go long to capitalize on the bounce back, knowing that institutional investors value the quality company more than the sell-off amount and will thus buy the dip they created.
^ “On March 21 at 11:49 EST a trader opened up new positions (largest for SQ last 7 days) for the SQ $74 Puts expiring 4/14/2023. They exited half of the trade this morning, turning $500k into around $5 million for 1000%.” – Unusual Whales
** ChatGPT: “The term “Innovation Stack” was coined by Jim McKelvey, co-founder of Square, to describe the unique set of challenges that a startup faces when trying to create a new market. According to McKelvey, an Innovation Stack is a set of interlocking and mutually reinforcing inventions that are required to create a new product or service, and that cannot be easily replicated by competitors.” Jim’s book is a great read about how Square came to be, how it defended an attack by Amazon and some analysis of other businesses that utilized an innovation stack. Put another way, the stack enables the flywheel and Block continues to spin.
// ChatGPT: WHY BUY … ?
Block, Inc (formerly known as Square) is a publicly traded company that provides various financial services and products, including payment processing, point-of-sale hardware and software, and small business loans.
There are several reasons why someone might consider buying shares of Block, Inc. Firstly, the company has a strong track record of growth and has been expanding its offerings beyond its core payment processing business. This diversification could help to reduce the company’s reliance on any single product or service and could lead to continued growth in the future.
Additionally, Block, Inc has a large and growing customer base, particularly among small and medium-sized businesses. As more and more businesses move towards digital payments and away from cash, Block, Inc is well-positioned to benefit from this trend.
// CONCLUSION
Their revenue has a 41% CAGR over 10 years. The next 10 years might be more like 14%. However, the EPS was only positive for 3 of those years, 2019-21. But the EPS growth rate over the next 4 years is 39%, with estimates from 2023 to 2026 going from $1.73 to $6.44. As long as margins move up too, this is a sign of a maturing business that is gearing up to profit on all the groundwork they have done. SQ won’t get the lofty price-to-revenue multiples anymore; real investors like FCF and SQ are poised to start delivering that. Their current price-to-revenue is 2.1. It could easily go to 5 or even 10 if the market gets exuberant.
// CATALYSTS
Cash App has increased transacting accounts by 15.9% year over year to 51 million by the end of 2022, despite tough macroeconomic times. Square Loans for SMBs increased 29% in 2022 to about 461,000 loans, totalling over $4B. Ability to cross-sell and up-sell with 44% of gross profit coming from users with 4 or more Block products (up 15% YoY). Signs of switching moat growth to go along with their brand moat. Room for global growth.
// RISKS
The Fed. Recession reduces spending at their SMB customers. Cash App user growth decreases. (could it be replaced by Spiral?)
// NEWS & COMMENTS
Mar 24, 2023
SA // buy: The Hindenburg Block Short Report Examined In Detail
I have read the full report and categorize the accusations in two categories: nothingburgers and more substantial claims. Hindenburg points out something Block could do better and a risk, but I don’t see any big red flags.
// GGI 💬
This article is a very helpful rebuttal to the short attack.
Mar 24, 2023
SA News: Cathie Wood bought the dip in Block and Coinbase
// GGI 💬
ARK took the opportunity to add 338,072 shares of SQ dispersed in three funds. SQ is now the eight largest holding in ARKK with a weighting of 5.62%.
Mar 13, 2023
SA // hold: Analysis Under Current Economic Conditions
For those that like the company but want to get in because of FOMO, the best way to play it would be to use dollar-cost averaging. Where the share price stands today isn’t bad, and taking a position here and averaging down if the stock goes down, would still result in an attractive cost basis for those in Block for the long term.
The other thing to consider would be to position size with discipline. I think for those in the stock for the long term, there is plenty of upside left in the share price. The big mistake is to take too big of a position based upon investment capital available.
Feb 27, 2023
SA // buy: Super Q4 With A Dual Growth Engine Ecosystem
Block is a tremendous fintech powerhouse that has scaled up two growing ecosystems of products. I believe these ecosystems will continue to grow rapidly with the “Cash App” leading the charge. I do expect slower demand for its “Square ecosystem” in 2023, but given the economy and recessions tend to be cyclical by nature I forecast improvements into 2024. Its Buy Now Pay Later service also has huge potential, and given Block is undervalued intrinsically (according to my model and forecasts), I will deem the stock a “buy” and a great long-term investment.
