Expanding access to the economy – Block | Summer Series

Bryce: [00:00:22] Welcome to the Equity Mates Summer Series. Proudly brought to you by Sharesies over 12 episodes where deep diving into some of the most exciting, interesting and well known companies from Australia and the US. Each episode we're also joined by an expert to help us unpack the key metrics, the bull case and the bear case for each company. My name is Bryce and as always, I'm joined by my equity buddy Ren. 

Alec: [00:00:42] How are you? I'm very good, Bryce. Great to be here. Great to be talking about a company that many of us know well. Many of us are obsessed with some of us. You made a lot of money on. Afterpay 

Bryce: [00:00:55] Afterpay. What was Afterpay? Which is now Block? 

Alec: [00:00:59] Well, yeah. 

Bryce: [00:01:02] Block after Block for Afterpay. But yesterday we're diving into BLOCK listed on the ASX and over in the United States. And our expert in the second half of this episode is Harrison Moot from TDM Growth Partners, who covers the stock as well as an equity analyst. So really excited to get him on to help us unpack it. There is a lot going on when it comes to Block. The Equity Mates summer series is proudly supported by Sharesies. The Sharesies platform was awarded a 2022 Canstar Innovation Excellence Award, with the judges saying the platform is, quote, unique with a significant wow factor as it reduces barriers to entry for new investors. And the second reason is that the platform is easy and approachable, especially with the auto invest feature where you can now truly execute dollar cost averaging into Australian, US and New Zealand markets. You can now download the Sharesies app or visit sharesies.com.au Today you to learn more and if you'd like $10 in your account to get started, use promo code GROW when you sign up promotion T&Cs apply. 

Alec: [00:02:07] Important to stress that that is not an Equity Mates exclusive promo code and we don't get commission or anything if you use it just gets you ten bucks in your account. But Bryce, final thing of this ever growing intro. We are not experts, we are licenced but were not familiar with your personal financial circumstances. Nothing in this part of the episode Owen Harrison comes on should be taken as anything more than general advice. 

Bryce: [00:02:32] All right. Well, then we've started each of these episodes with a sentence describing what the company does. So how do we explain Block. 

Alec: [00:02:41] A technology company that is trying to expand access to the economy? 

Bryce: [00:02:47] But that's yeah, it sounds like it's trying to change the world. 

Alec: [00:02:51] Well, isn't every company trying to change the world in their roles owns small? Yes. Why Equity Mates? Trying to change the world in its own small way. 

Bryce: [00:02:59] I guess so. 

Alec: [00:03:00] What about name a company that isn't trying to change the world? 

Bryce: [00:03:03] Candle makers.

Alec: [00:03:05] They're trying to light the world. 

Bryce: [00:03:06] It's no offence to any candle maker out there lawnmowers. 

Alec: [00:03:11] They're trying to keep the world neat and tidy. 

Bryce: [00:03:14] Facebook. 

Alec: [00:03:16] That's trying to connect dots in the metaverse. 

Bryce: [00:03:20] There is a number of facets to Block that we will unpack that I think shed light on that on that sentence. But let's start at the top. It was co-founded by Jack Dorsey and Jim Mckelvie in 2010. Now Jack Dorsey recalls.

Alec: [00:03:36] I'll explain Jack Dorsey, you explain Jim Mckelvie. 

Bryce: [00:03:38] Never heard of him. 

Alec: [00:03:40] Yeah, later, to be honest. 

Bryce: [00:03:42] Yeah. Well, what about Jack? We've all heard of Jack. 

Alec: [00:03:45] Yeah, co-founder of Twitter, co-founder of Square. Yeah. Changed his name to Block. Yeah. Bitcoin obsessed big Bitcoin guy. 

Bryce: [00:03:52] Yeah. Started after Dorsey saw that small merchants couldn't take credit card payments. So at the at the time, Block was a payments platform. 

Alec: [00:04:01] It was square squares. Most people know the square. 

Bryce: [00:04:04] Yeah, yeah. In essence. 

Alec: [00:04:05] And people will have all seen that. They may not be aware that they've seen it, but the white tile that you see at cafes, at stalls, that the white credit card rate, a tile that you can plug into a phone or an iPad or anything like that, or you can plug it into a computer. That is the core product. 

Bryce: [00:04:24] Yeah, pretty good. It's a pretty good product. Yeah, I must say. Yeah. Listen, in 2015 and in 2018, they started expanding. They bought Weebly for 365 million in stock rings. A bell. 

Alec: [00:04:38] Does it?Well, I think it's also. Yeah, it's a web hosting service. 

Bryce: [00:04:41] Weebly. Weebly. 

Bryce: [00:04:44] Yeah. Waverly. Anyway, in 2020, Ren Square put 1% of its assets into Bitcoin. Ooh, that's not good.

Alec: [00:04:54] I don't reckon that's even their worst acquisition. 

Bryce: [00:04:58] What is the worst acquisition?

Alec: [00:05:00] Maybe Afterpay. 

Bryce: [00:05:02] In 2021. 

Alec: [00:05:04] Afterpay would have followed a similar trajectory to zip and zip has fallen further than Bitcoin. 

Bryce: [00:05:10] Yes. Yeah. The Afterpay. 

Alec: [00:05:11] Yeah, we'll get to that one.

Bryce: [00:05:12] Really nailed it. Yeah. So in 2021, they acquired Jay-Z's streaming service Tidal For. 297 million. Haven't heard much about that since. 

Alec: [00:05:21] No, no. We'll get to an analysis of the company. Let's just get through the history. 

Bryce: [00:05:26] And then in 2021, they changed its name to BLOCK Inc. H&R BLOCK subsequently sues them for copyright infringement.

Alec: [00:05:35] H&R BLOCK, the tax terrorises successfully. 

Bryce: [00:05:40] I don't know in this. And then their SEO in Australia not great. They're getting beaten by daily Daily Mail articles about a verbal. 

Alec: [00:05:49] Yeah, that's not so much of that business. That's just more if you're a technology company, you can't be getting beaten by the Daily Mail SEO in their articles about the Block. 

Bryce: [00:06:04] For those listening overseas, the BLOCK is a reality TV renovation show. 

Alec: [00:06:08] Yes, yeah, yeah, yeah. The Daily Mail is a trash online publication that we hope to one day get featured in. 

Bryce: [00:06:15] And then finally in 2022, they completed the acquisition of Afterpay for a staggering $39 billion in stock. And congrats to Nick Molnar. And and I can't even remember.Anthony Eisen what what a moment. 

Alec: [00:06:31] You got to know so yeah yeah yeah that so yeah full credit. 

Bryce: [00:06:35] So where does that leave us today?

Alec: [00:06:36] So before we talk about the company today, because it is now like a family of businesses and that's why they change their name from Square to Block. I just I just want to note that on the Investor Relations website, they make no mention of Afterpay in the description of the business. Yeah. 

Bryce: [00:06:56] Do they just tucked it away?

Alec: [00:06:57] I don't know. I spent 39 billion in stock world. 39 billion in stock 2020 price 2021 prices. Yeah. Update your website.

Bryce: [00:07:10] Or be proud of your acquisition. Anyway, the company as it stands today has some has multiple parts to it and the core of it is square, which is their their point of sale or pause system and credit card processor. As Ren said, it's that small little white tile that plugs into phones, tablets. You would have seen it at coffee shops and allows people to just, I guess, seamlessly pay without having to have a fully integrated point of sale system. So they really opened that up. Yeah, currently in eight countries and they accept 130 different currencies. [00:07:44][33.5]

Alec: [00:07:44] Yeah. And I think this was what this story is where Jack Dorsey became such a Bitcoin believer. There's this video of him going around speaking at an all hands meeting, Foursquare back when it was just square and explaining how difficult it has been to roll square out and integrate it into eight different countries banking system and financial regulation and the merits of a global currency that that would allow like true cross-border transactions and truly globalised financial services businesses. And you can understand if the past decade of your life has been spent dealing with financial regulators in country after country after country, you can start to say the merits of theory, because it is interesting that the ability to accept 130 currencies happened really quickly because that's like a technical and business model challenge. But the actual expanding into those countries is a regulatory challenge. And there are 130 currencies and there are only eight countries. And that just shows how the pace of business and technological development move so much faster than the pace of regulatory acceptance. That really opened my eyes to where Dorsey is coming from. Yeah, maybe a little bit different to like in Anthony Pomp Pompliano or Preston Pierce. 

Bryce: [00:09:10] Yeah, yeah. Google them if you're unsure who they are. 

Alec: [00:09:13] Just slow down.

Bryce: [00:09:15] So big part of the business is the point of sale square. But then the second sort of big chunk part is their cash app, which really is building on what you've just spoken about further than enabling mobile to mobile transfers of money. You to me kind of similar to what payments doing here in Australia in some way. 

Alec: [00:09:38] I was actually having this conversation with someone a couple of days ago, I think. So Venmo and Cash up two big ones over in the US that really took mobile and made mobile and mobile transfers in the US. I reckon the big banks in Australia saw that and were like, We don't want someone else doing it, so we'll do it. 

Bryce: [00:09:56] And that's where payment. 

Alec: [00:09:58] Yeah. Because payments owned by the bank.

Bryce: [00:09:59] Yeah. Yeah. For those are on our way of payment. Is I. Awesome. Get on it. Yeah, it's pretty awesome. 

Alec: [00:10:05] And even my parents are now on. Oh wow. Yeah. 

Bryce: [00:10:07] They're discovering it's an app that allows you to transfer money without going into your bank accounts. It is done through. Mobile. So you just plug in your contacts and mobile numbers and you can seamlessly transfer money. 

Alec: [00:10:23] Oh, you know what? Sorry. It was set up by the major banks, but if possible, in 2020. 

Bryce: [00:10:29] Oh, okay. There you go. So 36 million monthly active customers in 2020 on the Cash app and they've expanded to offer crypto and stock trading beyond just transfers of money. And they now also issue debit cards with accounts and looking to allow users to borrow small sums of money up to 200 bucks. 

Alec: [00:10:51] So they're basically building out a bank. 

Bryce: [00:10:54] A mini bank? Yeah. Yeah. A digital. 

Alec: [00:10:56] Digital bank. Yes. Which is the point. 

Bryce: [00:10:59] Yes, I have got square, we've got cash app but Afterpay buy now, pay later. 

Alec: [00:11:06] I mean I feel like most people listening are familiar with the buy now pay later business model and Afterpay. Yeah, that square bought it for 39 billion and it was at the top of the market but 39 billion in stock. You can shave about 70% off that price because Blocks New York Stock Exchange share price is down about 70% now. Interesting nuance. Why is Block's Australian share price only down 50%? 

Bryce: [00:11:37] Currency. 

Alec: [00:11:37] Yeah, the US dollar is strong. All right, so we've got Square, we've got Cash App, we've got Afterpay. What else have we got? 

Bryce: [00:11:48] Tidal subscription, music, streaming service, random acquisition. 

Alec: [00:11:52] Meant to be fairer to artists. 

Bryce: [00:11:54] Fairer to artists. Haven't used it. I haven't heard much about it. Don't know how. Like it doesn't feel like it's pushing up against Spotify or Apple Music or YouTube. But yeah, that was from Jay-Z, wasn't it? They've got their web hosting service, weebly. And then TBD is another business service. Yes. They're building an open developer platform to make it easier to access Bitcoin and Blockchain technologies all over the place. 

Alec: [00:12:23] And it's called TBD. 

Bryce: [00:12:25] BLOCK development. 

Alec: [00:12:26] Something. No, no, no. I think it's like to be decided. Oh, yeah. It's like an edgy tech guy, I think.

Bryce: [00:12:35] And then spiral formally square crypto builds and funds free open source projects that advance the use of Bitcoin as a tool for economic empowerment. Dorsey's views on Bitcoin coming through in multiple parts of the business. 

Alec: [00:12:48] So square, cash up, Afterpay, Tidal, Weebly, TBD, Spiral seven business units connect them for me. How does this make sense? 

Bryce: [00:12:59] Payments. Cash app. Afterpay. All makes sense. Tidal payments I guess. All makes sense. The rest couldn't do it.

Alec: [00:13:08] Okay.

Bryce: [00:13:09] I think Blockchain maybe under you could underlie it all with Blockchain on payments on top of Blockchain. Yeah, that sort of stuff. The streaming service, I have no idea. 

Alec: [00:13:20] I was trying to think I can't get the web hosting service into it. That one I can't quite see. But everything else you could say, they want to build the future of the economy and they want to make it more open and more accessible. But that but really from a business point of view, they want to have they want to own every facet of it. They want a digital bank. They want to process payments. They want to be your credit provider bank.No, no. You know how like you bank with Commonwealth Bank, but your credit card is like Qantas Rewards or American Express, you know, like they're often separate businesses. They want to be both, which is how Afterpay comes into it, and then they want to be on the forefront of wherever Blockchain fits into the new financial ecosystem. Like that. So I guess like if you think of them as a building like that, the next generation of bank, you can start to see how these businesses all fit together. And then you ask how tidal fits into that. They want to have a foothold in the creator economy. That's what Spotify and stuff all talk about. On their Investor Relations overview. In Tidal, they talk about how it gives artists the tools to succeed as entrepreneurs. So maybe as creators become more businesses. I mean, like where an example of that, maybe it's like they want to sit in that world somehow, potentially time. Lonely time. Yeah. Anyway, let's keep moving. So I just. I just want to call out that on their website, they list expanding access to the economy. BLOCK Inc is Square Cash App Spiral Tidal TBD and our foundational team such as council finance and people Afterpay not mention that. They literally mentioned the legal counsel team, but they don't mention and then they list square help sell us blah blah blah cash up spiral tidal TBD. Together we're working to build our diverse audiences, sellers, individuals, artists, fans, developers and all the people in between to overcome barriers to access the economy. Update your Investor Relations page, put the pride of Australia, Afterpay, front and centre. They're obviously not proud of it. I just thought that was an interesting note. Yeah. So let's drill down on square because there's a number of aspects of this business that are all in different stages of growth. But I think Square is the engine here. Square is the really impressive story, and square is where a conversation about Blocks should start. And we talk about Square as the little payments process to the point of sale, but they've built out a full suite of products under the square business. I think we've actually done some ads for them like their h.r. Software and timesheets and stuff like that is basically they want to be the go to resource for small and medium sized businesses around the world. Well, in countries that they operate in and you know, they even do I think they even do some financing of invoices and they have a whole bunch of h.r. Staff and scheduling. They have a point of sale, obviously. And the story of square is a really impressive story where they get a foothold with the payments processor. And then they cross-sell and they sell you. You as the small and medium sized business into all these other services that they offer under the square business. So from a recent presentation, 40% of the gross profit from the square business comes from sellers that use four or more of their monetised products. So that's just a story of cross-selling. They've got this chart that goes from 2015 to 2021 and and looks at the amount of users and how many products they use one, two, three or four plus in 2015, call it about 60, 65% of their users was only using one product. By 2018, it was maybe 30%. By 2021, it's maybe 15% in that same time, four plus. In 2015, it was less than 10%. We're using four plus products. Now it's just shy of 50%.

Bryce: [00:17:36] Well, I mean, if there's any way to keep customers and keep customers, it's to continue to integrate as many processes as. 

Alec: [00:17:44] Possible, get them hooked on devices. 

Bryce: [00:17:46] Yeah. So they've done well. And this really leads to the conversation of where the company sees its future. And it's no doubt that growing that ecosystem with more business units, well, not only the ecosystem within Square, but I think the ecosystem that they're building from a business unit point of view is, is no doubt where this company seems to be going. 

Alec: [00:18:08] You could think of it as a two sided marketplace in some ways, where Square is trying to help small business, small and medium sized businesses. And then the Cash app and Afterpay is trying to get the customers and Square tries to be the integration in the middle. 

Bryce: [00:18:23] Yeah so they they looking to increase penetration in the US and launch some of their products outside because cash app's not available outside of the U.S. at the moment. 

Alec: [00:18:35] I don't believe so. 

Bryce: [00:18:36] Yeah, it's just it's just in the U.S.. 

Alec: [00:18:38] I mean, you'd be foolish to come to Australia now, but. Yeah. Hey guys, it owns them up. Those are the three things. On growing the ecosystem. That's where I guess the Bitcoin conversation comes into it a little bit. They certainly say Bitcoin is a key pillar of the future. In some of the decks they talk about Bitcoin wallets, Bitcoin mining tape day, they just list there, which is just so descriptive you can get out. And so crypto is a key focus for them and then create, as they mentioned with title. 

Bryce: [00:19:14] Okay. So that's expanding ecosystem. 

Alec: [00:19:17] I think implicit in that is just getting cash. So getting square into more than eight countries as well.

Bryce: [00:19:22] All right. So what about us increasing US penetration? They currently reach less than 20% of the US population. 

Alec: [00:19:29] Yeah. And so huge. 

Bryce: [00:19:31] Opportunity. 

Alec: [00:19:32] This is mainly looking at cash up 20% of gen-z use them, 17% of millennials, 10% of Gen X and 4% of baby boomers. So every category there has potential. I guess Venmo is bigger. That's the other one you hear about in the US. Yeah, yeah. But their potential to grow all of those things. Also, if you just look at those like as well as the world gets older and there are, you know, Generation Alpha comes through baby boomers, there are less of them. That shift will work in their favour.

Bryce: [00:20:08] Yeah, of course. Yeah, yeah. As more and more tech savvy people. Come on. And then the third is expanding outside the US back in 2018. Their Q3 numbers in terms of percentage of Square's gross profit coming from outside the U.S., it was only 5% that has grown over the last four years to 15%, but still with 15% coming outside U.S. Still plenty of opportunity. Yeah, to expand overseas. 

Alec: [00:20:37] And like 15%. But the raw numbers as well, 13 million of that gross profit in 2018, Q3, 2018, 121 million in Q3, 2022. Pretty impressive. 

Bryce: [00:20:50] Well, let's talk about the numbers around market cap of 38 billion it is down. Well, I think we said at the top of the show about 70% now year to date. Was that right?

Alec: [00:20:59] 73% year to date.

Bryce: [00:21:00] 73%. 

Alec: [00:21:01] 69, 69% over the past.

Bryce: [00:21:04] Year. So it's up 66% in the past five years. So from 2017 through to COVID, it roared up 120%, but then got hit during the COVID crash of February and March in 2020, down 54%. It was then up 622% between March 2020 and August 2020, when everything was just ripping post coated. 

Alec: [00:21:28] Everything, but especially not profitable tech come down. 

Bryce: [00:21:31] Oh my goodness, up 622% and then down 77. 7% from there to today. 

Alec: [00:21:37] Yeah. Put a pin in that. Not profitable tech companies will get that. 

Bryce: [00:21:40] Okay. And so for those gaming scores, after all that, it is 66% over the past five years, down 24% from February 2020 right before the COVID crash.

Alec: [00:21:50] A lot of numbers there. The key takeaway is its US tech stock that is highly correlated to the fortunes of all the other tech stocks. And it was a big winner in the boom and it's been a big loser in the bust. 

Bryce: [00:22:04] That's it. So revenue 17.7 billion. Five years ago, it was only 1.7, up 933% over the past five years. And their year on year revenue growth numbers have been very, very impressive. Nothing to shy away from. We'd love to see this in your business. So back from 2012, which is where we get data from. We had 2012 to 13, 172% revenue growth, 54%. The following year, 49%, 35%, 30%, 49%, 43%, 102%. And then 86%. On year revenue growth. And Ren, is it profitable? 

Alec: [00:22:50] Surprisingly, it is profitable. 166 million in profit. So that's like a 1% profit margin. Still better than many of its tech peers, but it's actually been profitable for the last three years all through the COVID period. So 2019, it returned 375 million in profit, 2020 213 million in profit, 2021 166 million and profit loss. So going the wrong way. 

Bryce: [00:23:17] So it is going the wrong way, but it's still a profitable tech company. 

Alec: [00:23:22] Yeah, it was making losses before that, obviously, but it's a really impressive story. 

Bryce: [00:23:27] It is Ren and we are excited to have an expert joining us very shortly to help us unpack it. Is there anything you wanted to close out with before we get Harrison in? 

Alec: [00:23:38] No, I think let's get the expert in and talk about the company as an investment option rather than what the company does love. 

Bryce: [00:23:45] Block is listed on the ASX SQ2 is the ticker here in Australia. It is also listed on the New York Stock Exchange with the ticker SQ dual listed. You can access the US stock market plus the Australian and New Zealand markets on the Sharesies platform with no investment minimum use promo code GROW when you sign up to the Sharesies platform for $10 in your account ready to invest all investing involves risk. This is not a recommendation and you should perform your own research promotes and sees apply so we'll we'll leave it there. We have hit the end of our episode now. Traditionally, we have been bringing in an expert on the other side of the break, but our conversation with our expert for BLOCK Harrison Moot from Taylor and Growth Partners was so, so enjoyable that we've actually split it into a second episode. So it will be available in your feed now. But if you want to hear the bull case in better case on BLOCK from Harrison, tune into that. A shout out to Sharesies for sponsoring the Equity Mates Summer Series. Download the Sharesies app or visit sharesies.com.au to learn more but Ren. We'll be picking it up with Harrison in the next episode. 

Alec: [00:24:45] It sounds good.