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Block (SQ): Bitcoin Action Negative For Upcoming Earnings

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roadblock (New York Stock Exchange:mint(including Facebook’s parent meta platforms)dead) formed a strange duo in 2021 when both companies decided to change their names to broadly reflect cryptocurrency and the metaverse, the double differentials of the time. It was not entirely clear that the cryptocurrency market would collapse in less than a year. In fact, the zeitgeist for most of 2021 has been marked by rapture-drinking animal spirits and a retail boom that has seen bubbles pop up in everything from SPACs to NFTs. It really was an era of easy money, so when it was over, he did so with great fanfare.

To be fair to Block, its name change was also supposed to reflect its larger business scope. This included Jay-Z TIDAL’s music streaming platform and Australian buy now, pay later afterpay acquired in an all-share deal for $29 billion. Essentially, the crypto victorious hub, BNPL, and music streaming were made by Block at the height of market sentiment. In fact, Afterpay’s biggest competitor, Klarna, recently completed a landing round that saw its valuation drop $45.6 billion to $6.7 billiondown 85%.

San Francisco-based competitor BNPL agrees with Amazon (AMZNThe partnership is down 89% to $5.29 billion from an all-time high. Block is undoubtedly an overpayment for Afterpay which is now a liability on the back of high interest rates and the global economy is on the brink of recession.

Large write-offs are likely

A write-down occurs when a company reduces the book value of an asset when its fair market value falls below book value. Hence, while Square’s balance sheet was in relatively good shape as of the end of the recently announced second quarter of fiscal year 2022 with cash and cash equivalents less than 5 billion dollars For a total debt of $5.3 billion, the company incurred a goodwill of just under $12 billion. This constituted 41.5% of the company’s total assets and mainly consisted of the surplus from the purchase of Afterpay.

How much is Afterpay worth now? Using a candid comparison with peers and the broader e-commerce sector, the company is likely to currently trade on the Australian Stock Exchange at a valuation range of between $2.9 billion and $5.8 billion if never acquired. This number would be lower if it were adjusted lower for the 30% premium over the market price paid by Block.

data by YCharts

This takes into account a potential impairment cost of at least 80% of current goodwill. While this would be a non-cash fee, it would see equity drop 57% to $7.3 billion. Moreover, when combined with what appears to be a deterioration in Block’s liquidity position on the back of a negative cash burn from operations worth $114.6 million, the decline will become even steeper.

data by YCharts

The uncertain macro backdrop is already weighing on Block’s common stock as the company’s underlying financial profile appears to be heading lower. To be clear here, BNPL is the glorification of secondary lending. Mass market consumers are allowed to use different financing options to spread out the cost of their purchase at the point of exit. This is an inherently high-risk endeavor against the specter of stagnation.

The current BNPL Group was established in the wake of the 2008 global financial crisis in the wake of regulations that encouraged the proliferation of non-bank lenders. It has not been tested in a recessionary environment characterized by low real income, high inflation and high interest rates. Hence, Block may find that Afterpay’s consumer credit performance is deteriorating and that it will have to make broad cuts in its portfolio if risk is not managed well. Crucially, managing this risk means the company is materially underwriting a large segment of its currently active client base. This will significantly slow BNPL’s growth and reduce the synergies achieved with Afterpay’s continued integration with the Cash app and Square seller ecosystem. This was recently expanded to United kingdom And the Canada.

Chase the hype around and discover

Block growth is negative with fourth-quarter revenue reported in $4.41 billion, down 5.8% from the previous quarter. This came on the back of a slowdown in the low-margin bitcoin trading business which accounted for 56.6% of the company’s fiscal 2021 revenue and had a gross margin of less than 3% during one of the most booming bitcoin bull markets in years. Bitcoin trading is an inherently volatile and unstable business with returns on the crypto exchange Coinbase (Currency) down 64% On an annual basis for the last reported quarter.

It looks like Block is on the cusp of negative gross margins on its bitcoin business this year as the volatile retail trade that drove much of the initial trading boom fizzles out with the collapse of most of the speculative trading phenomena seen in 2021. There could be more pain. Most of the developed world is expected to fall into recession next year as high inflation forces the newly tightened Federal Reserve to a series of interest rate increases. Pay the ban at the top for Afterpay. Bitcoin, its biggest revenue driver, is now set to be a drag on profits for the foreseeable future. Stocks could drop pretty much into the $40 range on the back of that. However, the market remains volatile and the upside risks remain if the current hawkish Fed stance is felt. This is the most relevant near-term risk for a downside deal.

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