Fintech

Block: 3 Reasons to Buy This Fintech Now (NYSE:SQ)

Published

10 months ago

9 June, 2024

andresr

Block (NYSE:m2) remains a very attractive growth play for Fintech investors in fiscal 2024 as it sees continued gross earnings momentum across both core business segments, is benefiting from strong Cash App Card adoption and the most recent downtrend in the valuation makes the shares attractive from a valuation point of even seeing. Block shares have continued to sell off following Fintech’s solid Q1 2024 earnings, and I believe the drop represents a new engagement opportunity for long-term investors looking to increase their exposure to the fast-growing sector!

Data from YCharts

Previous rating

In my last article on Block I indicated that Fintech was doing a great job growing its gross profits across the board, but especially in Cash App, and that the profitability picture continued to improve: The blowout guidance makes this Fintech a strong buy. Block performed very well in this regard in the fiscal first quarter, but it retains considerable growth and upside potential in the Fintech market as it attracts more Cash App Card users. Block’s growth also compares favorably with that of PayPal (PYPL), which is struggling to keep customers on its payment platform.

Strong growth with significant earnings momentum

In the past, I’ve indicated that Block had considerable potential in the Fintech space due to the company’s aggressive scaling of its Cash App, which was essentially where all the momentum for Block was. In the latest quarter, Q1’24, Cash App’s gross earnings grew 25% year-over-year to a record $1.26 billion, while Square, which includes the fintech’s point-of-sale payment services , recorded 19% year-over-year growth to $820. M. While both segments clearly have momentum due to user growth (in Cash App) and growing product adoption (Square), Cash App remains the fastest growing and most important business segment for Block, and it is unlikely that this will change in the future.

To block

Cash App still has significant growth potential, as Block estimates the company only penetrates about 20% of the market. Generation Z and Millennials, who are Cash App’s most prolific users, represent a huge growth opportunity for Block in the coming years, and the company’s Cash App Card could be the product that attracts them.

To block

A key product for Block is the Cash App Card, which is a customizable debit card that can be used both online and in stores. The Cash App Card is connected to the Cash App and therefore allows easy and immediate money transfers, which is especially appreciated by younger users. This financial product is experiencing constant growth and currently has 24 million assets and growing usage.

To block

Cash App is primarily driving Block’s adjusted EBITDA gains in recent quarters. In the first quarter of 2024, the Fintech sector reported EBITDA growth of 92% year-over-year to $705 million, as well as significant expansion in EBITDA margins. In the previous quarter, Block posted an adjusted EBITDA margin of just 24%, so the fintech generated a quarterly gain of 10 PP in its most important metric.

To block

More money flows to Cash App. Millennials and Gen Z are responsible for 70% of cash inflows from Cash App as they tend to use the app more and are set to become the driving force of incremental cash flows in the future. In fiscal 2023, Block’s Cash App recorded inflows of $248 billion, showing 22% year-over-year growth. In 1Q24, Cash App inflows were $71 billion, growing 17% year over year. With more money flowing to Cash App (and greater app adoption), the ecosystem and the Cash App Card only become more attractive to users.

To block

3 catalysts for an upward revaluation

I see 3 specific catalysts for an upward revaluation of the stock price in fiscal 2024 and beyond:

Continued growth in Cash App Card growth (both in terms of users and usage)
Block is now consistently profitable on an adjusted EBITDA basis. I expect Fintech to be able to increase its EBITDA margins as it acquires more Millennial and Gen Z users
The growth of incoming cash flows could make Cash App a very viable alternative to other payment services, including those offered by PayPal.

Block’s assessment

The good news from Block is that the fintech is already profitable, not just on an adjusted EBITDA basis, but also on a net profit basis. Therefore, Block can be valued using a traditional price-to-earnings ratio. The Fintech is currently valued at a P/E ratio of 15.1X which compares, for example, to a P/E ratio of 14.8X for PayPal, which is a key rival to Block in the Fintech space. Both Block and PayPal have traded at significantly higher P/E ratios in the past, especially during the pandemic, and Block is currently priced much lower than its long-term (3-year) average P/E ratio of 64.1X. PayPal’s 3-year average P/E ratio is 25.8X, so both PayPal and Block are trading significantly below their historical valuation averages. In PayPal’s case, I think this valuation cut is a little more deserved, but Block is doing well and growing much faster: Block is seeing annual EPS growth rates above 20% (through fiscal 2027 ).

As I indicated above, PayPal has fundamental problems remain relevant with its payment processing services, which has been reflected in an erosion of its customer base. Over the past year, PayPal has been almost constantly losing customers, leading to subdued EPS growth expectations for the fintech. PayPal is expected to grow its EPS by just 11% next year, which may be an optimistic estimate considering the company is still losing customers.

Block, on the other hand, is expected to continue growing in double digits (+28% y/y in fiscal 2025), which explains why I see Fintech as a very attractive alternative to PayPal… which essentially does trading at the same valuation multiplier. In my latest work on Block I stated that improving profitability and Cash App momentum are the reasons I see a fair value P/E ratio of 25X, which has not changed. With a consensus EPS estimate of $4.32 for fiscal 2025, Block has a fair value near $108 and significant appreciation potential… if Fintech continues to perform well.

Data from YCharts

Risks with Blocking

There are a number of risks that could affect how I view an investment in Block. If Fintech continues to grow its gross profits by double digits while improving its EBITDA, then I would be very happy to hold on to Block for a long time. What would change minds, however, is if Block fails to expand its EBITDA margins or if the Fintech sees a noticeable slowdown in growth in its high-performing Cash App business. Slowing Cash App Card adoption rates would also be a reason to reevaluate the investment thesis.

Final thoughts

Block remains a compelling growth story in the Fintech sector, especially since PayPal’s growth problems contrast well with and benefit Block. Fintech generated notable gross profit growth last quarter, primarily driven by growth in the Cash App segment. I believe Block’s profit explosion in fiscal 2024 indicates strong potential for EBITDA margin expansion, driven primarily by two groups of people: Millennials and Gen Z users. The stock is a bargain, in my opinion, and Block has the growth to support this valuation. I believe the risk profile for long-term investors in the Fintech market is still very attractive and I see continued upside in appreciation if Block continues to execute its growth strategy well, especially in Cash App!

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Fintech

US Agencies Request Information on Bank-Fintech Dealings

Published

9 months ago

30 July, 2024

FinCrypt Staff

Federal banking regulators have issued a statement reminding banks of the potential risks associated with third-party arrangements to provide bank deposit products and services.

The agencies support responsible innovation and banks that engage in these arrangements in a safe and fair manner and in compliance with applicable law. While these arrangements may offer benefits, supervisory experience has identified a number of safety and soundness, compliance, and consumer concerns with the management of these arrangements. The statement details potential risks and provides examples of effective risk management practices for these arrangements. Additionally, the statement reminds banks of existing legal requirements, guidance, and related resources and provides insights that the agencies have gained through their oversight. The statement does not establish new supervisory expectations.

Separately, the agencies requested additional information on a broad range of arrangements between banks and fintechs, including for deposit, payment, and lending products and services. The agencies are seeking input on the nature and implications of arrangements between banks and fintechs and effective risk management practices.

The agencies are considering whether to take additional steps to ensure that banks effectively manage the risks associated with these different types of arrangements.

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Fintech

What changes in financial regulation have impacted the development of financial technology?

Published

9 months ago

30 July, 2024

FinCrypt Staff

Exploring the complex landscape of global financial regulation, we gather insights from leading fintech leaders, including CEOs and finance experts. From the game-changing impact of PSD2 to the significant role of GDPR in data security, explore the four key regulatory changes that have reshaped fintech development, answering the question: “What changes in financial regulation have impacted fintech development?”

PSD2 revolutionizes access to financial technology
GDPR Improves Fintech Data Privacy
Regulatory Sandboxes Drive Fintech Innovation
GDPR Impacts Fintech Data Security

PSD2 revolutionizes access to financial technology

When it comes to regulatory impact on fintech development, nothing comes close to PSD2. This EU regulation has created a new level playing field for market players of all sizes, from fintech startups to established banks. It has had a ripple effect on other markets around the world, inspiring similar regulatory frameworks and driving global innovation in fintech.

The Payment Services Directive (PSD2), the EU law in force since 2018, has revolutionized the fintech industry by requiring banks to provide third-party payment providers (TPPs) with access to payment services and customer account information via open APIs. This has democratized access to financial data, fostering the development of personalized financial instruments and seamless payment solutions. Advanced security measures such as Strong Customer Authentication (SCA) have increased consumer trust, pushing both fintech companies and traditional banks to innovate and collaborate more effectively, resulting in a dynamic and consumer-friendly financial ecosystem.

The impact of PSD2 has extended beyond the EU, inspiring similar regulations around the world. Countries such as the UK, Australia and Canada have launched their own open banking initiatives, spurred by the benefits seen in the EU. PSD2 has highlighted the benefits of open banking, also prompting US financial institutions and fintech companies to explore similar initiatives voluntarily.

This has led to a global wave of fintech innovation, with financial institutions and fintech companies offering more integrated, personalized and secure services. The EU’s leadership in open banking through PSD2 has set a global standard, promoting regulatory harmonization and fostering an interconnected and innovative global financial ecosystem.

Looking ahead, the EU’s PSD3 proposals and Financial Data Access (FIDA) regulations promise to further advance open banking. PSD3 aims to refine and build on PSD2, with a focus on improving transaction security, fraud prevention, and integration between banks and TPPs. FIDA will expand data sharing beyond payment accounts to include areas such as insurance and investments, paving the way for more comprehensive financial products and services.

These developments are set to further enhance connectivity, efficiency and innovation in financial services, cementing open banking as a key component of the global financial infrastructure.

Sebastian Malczyk

General Manager, Technology and Product Consultant Fintech, Insurtech, Miquido

GDPR Improves Fintech Data Privacy

Privacy and data protection have been taken to another level by the General Data Protection Regulation (GDPR), forcing fintech companies to tighten their data management. In compliance with the GDPR, organizations must ensure that personal data is processed fairly, transparently, and securely.

This has led to increased innovation in fintech towards technologies such as encryption and anonymization for data protection. GDPR was described as a top priority in the data protection strategies of 92% of US-based companies surveyed by PwC.

Arid Islam

Financial Expert, Sterlinx Global

Regulatory Sandboxes Drive Fintech Innovation

Since the UK’s Financial Conduct Authority (FCA) pioneered sandbox regulatory frameworks in 2016 to enable fintech startups to explore new products and services, similar frameworks have been introduced in other countries.

This has reduced the “crippling effect on innovation” caused by a “one size fits all” regulatory approach, which would also require machines to be built to complete regulatory compliance before any testing. Successful applications within sandboxes give regulators the confidence to move forward and address gaps in laws, regulations, or supervisory approaches. This has led to widespread adoption of new technologies and business models and helped channel private sector dynamism, while keeping consumers protected and imposing appropriate regulatory requirements.

George Blandford

Co-founder, UK Linkology

GDPR Impacts Fintech Data Security

A big change in financial regulations that has had a real impact on fintech is the 2018 EU General Data Protection Regulation (GDPR). I have seen how GDPR has pushed us to focus more on user privacy and data security.

GDPR means we have to handle personal data much more carefully. At Leverage, we have had to step up our game to meet these new rules. We have improved our data encryption and started doing regular security audits. It was a little tricky at first, but it has made our systems much more secure.

For example, we’ve added features that give users more control over their data, like simple consent tools and clear privacy notices. These changes have helped us comply with GDPR and made our customers feel more confident in how we handle their information.

I believe that GDPR has made fintech companies, including us at Leverage, more transparent and secure. It has helped build trust with our users, showing them that we take data protection seriously.

Dr. Rhett Stubbendeck

CEO & Co-Founder, Leverage Planning

Source

Fintech

M2P Fintech About to Raise $80M

Published

9 months ago

30 July, 2024

FinCrypt Staff

Application Programming Interface (API) Infrastructure Platform M2P Financial Technology has reached the final round to raise $80 million, at a valuation of $900 million.

Specifically, M2P Fintech, formerly known as Yap, is closing a new funding round involving new and existing investors, according to entrackr.com. The India-based company, which last raised funding two and a half years ago, previously secured $56 million in a round led by Insight Partners, earning a post-money valuation of $650 million.

A source indicated that M2P Fintech is ready to raise $80 million in this new funding round, led by a new investor. Existing backers, including Insight Partners, are also expected to participate. The new funding is expected to go toward enhancing the company’s technology infrastructure and driving growth in domestic and international markets.

What does M2P Fintech do?

M2P Fintech’s API platform enables businesses to provide branded financial services through partnerships with fintech companies while maintaining regulatory compliance. In addition to its operations in India, the company is active in Nepal, UAE, Australia, New Zealand, Philippines, Bahrain, Egypt, and many other countries.

Another source revealed that M2P Fintech’s valuation in this funding round is expected to be between USD 880 million and USD 900 million (post-money). The company has reportedly received a term sheet and the deal is expected to be publicly announced soon. The Tiger Global-backed company has acquired six companies to date, including Goals101, Syntizen, and BSG ITSOFT, to enhance its service offerings.

According to TheKredible, Beenext is the company’s largest shareholder with over 13% ownership, while the co-founders collectively own 34% of the company. Although M2P Fintech has yet to release its FY24 financials, it has reported a significant increase in operating revenue. However, this growth has also been accompanied by a substantial increase in losses.

Source

Fintech

Scottish financial technology firm Aveni secures £11m to expand AI offering

Published

9 months ago

30 July, 2024

FinCrypt Staff

Aveni, Investment Management, AI, NLP, UK

By Gloria Methri

Today

To come
Aveni Assistance
Aveni Detection

Artificial intelligence Financial Technology Aveni has announced one of the largest Series A investments in a Scottish company this year, amounting to £11 million. The investment is led by Puma Private Equity with participation from Par Equity, Lloyds Banking Group and Nationwide.

Aveni combines AI expertise with extensive financial services experience to create large language models (LLMs) and AI products designed specifically for the financial services industry. It is trusted by some of the UK’s leading financial services firms. It has seen significant business growth over the past two years through its conformity and productivity solutions, Aveni Detect and Aveni Assist.

This investment will enable Aveni to build on the success of its existing products, further consolidate its presence in the sector and introduce advanced technologies through FinLLM, a large-scale language model specifically for financial services.

FinLLM is being developed in partnership with new investors Lloyds Banking Group and Nationwide. It is a large, industry-aligned language model that aims to set the standard for transparent, responsible and ethical adoption of generative AI in UK financial services.

Following the investment, the team developing the FinLLM will be based at the Edinburgh Futures Institute, in a state-of-the-art facility.

Joseph Twigg, CEO of Aveniexplained, “The financial services industry doesn’t need AI models that can quote Shakespeare; it needs AI models that deliver transparency, trust, and most importantly, fairness. The way to achieve this is to develop small, highly tuned language models, trained on financial services data, and reviewed by financial services experts for specific financial services use cases. Generative AI is the most significant technological evolution of our generation, and we are in the early stages of adoption. This represents a significant opportunity for Aveni and our partners. The goal with FinLLM is to set a new standard for the controlled, responsible, and ethical adoption of generative AI, outperforming all other generic models in our select financial services use cases.”