Last week,
Block (
$SQ) reported Q4 2022 earnings that were largely well-received; both Cash App and Square surpassed Wall Street expectations on growth and gross margins. But the biggest highlight was Jack Dorsey's introduction of a new investment framework that took
stock-based compensation fully into account when measuring profitability. In doing so, Dorsey may be signaling a new era for
Block. After all, with 2022 gross profits of almost $6bn (more than double that of competitor
$SHOP) it may be overdue for
GAAP profitability. Current markets have switched from “growth at all costs” to “
show me the money” since interest rates started skyrocketing.
However, as transparent as Dorsey was with cost discipline and stock-based compensation, he was quite silent on Afterpay, which was acquired by Block in January 2022 for $29bn. It is a popular Buy-Now-Pay-Later (BNPL) service that represents the largest pivot that Block has ever made in its corporate history. It was also an expensive acquisition made at the height of the technology bull market and BNPL fever, with $12bn of resultant goodwill sitting on Block’s balance sheet.
Going into Q4 2022 earnings, I was expecting Block to take a write-down on the goodwill, given higher interest rates, weaker consumer sentiment, and drastic drop in peer valuations, notably of Klarna and Affirm (
$AFRM). It did not happen, but it remains a risk factor.
Click on the link below to get the highlights of Block's Q4 2022 earnings and a discussion of what Afterpay may mean under its new investment framework. Do subscribe to my weekly blog,
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