What happened
Shares of fintech giant Block (SQ +0.07%), formerly Square, tumbled in Wednesday morning trading after The Wall Street Journal warned that business is getting tough in the buy now, pay later (BNPL) space.
As of 11:40 a.m. ET, Block stock is down 5%.
Image source: Getty Images.
So what
The company was an early entrant into the BNPL space, bidding $29 billion in August 2021 to acquire Australian BNPL leader Afterpay and its 16 million installment-paying customers. But things haven't worked out well for Block since.
A trend of investors cycling out of unprofitable tech companies and into value stocks, and worries over rising inflation, rising interest rates, and a potential recession on the horizon, have combined to cut 70% off of Block's market capitalization since the date the Afterpay acquisition was announced. With Block now valued at just $48 billion, the $29 billion spent to acquire Afterpay currently makes up the majority of Block's worth.
This could be a problem for Block because, as WSJ reports today, rising interest rates are raising the cost of financing the de facto loans that permit Block/Afterpay to offer BNPL to its customers. At the same time, consumer delinquencies are on the rise, increasing the potential for customers defaulting on their BNPL loans -- and sticking Block with the loss.
Now what
"To weather the storm, Afterpay and [other BNPL players] are slowing their new originations," notes the Journal.
On the plus side, this could help to limit the company's downside if the economy gets worse and the trends noted above continue. On the downside, however, slower loan growth will slow Block's growth rate, period. And growth investors who've been betting on Block to achieve the 15% long-term earnings growth rate that Wall Street has forecast for it may not be pleased to hear that -- especially not now that Block has delivered back-to-back earnings losses in its two most recent quarters (according to data from S&P Global Market Intelligence).
Granted, Block stock is still free-cash-flow positive despite its losses under generally accepted accounting principles (GAAP), but with a recent valuation of nearly 50% free cash flow, a 15% growth rate, and new questions about Block's ability to hit even that growth number, Block stock isn't one I'd want to be invested in right now.
