Analyst’s Take on How BNPL Regulation May Affect Block (NYSE:SQ)

JMP Securities analyst David Scharf maintains Block Inc, trading as SQ on the New York Stock Exchange, with a Market Perform rating.

• Regulators in Australia have announced plans to introduce new rules for the Buy Now Pay Later (BNPL) asset class, which would treat the industry as a standard consumer finance provider.
• The proposed regulatory framework for BNPL follows similar moves made by regulators in other countries. The pace of regulatory proposals is expected to increase as BNPL volume grows across global markets.
• The proposed regulations may particularly affect home-grown BNPL firms like Afterpay and Zip, which have the majority of their revenue from the Australian market.
• Although SQ does not break out BNPL revenue by region, roughly 45% of underlying sales financed through Afterpay were from Australia and New Zealand in 2021. Based on this, it is estimated that roughly $365 million of SQ’s revenue in 2022 was derived from BNPL operations in these two countries. This translates to $265 million in gross profit which represents 5% and 10% of SQ’s overall revenue and gross profit respectively.
• One major potential risk for SQ is stricter oversight across many markets which may impede Afterpay’s growth and unit economics in the BNPL space.
• Scharf will continue monitoring regulatory developments in SQ’s key markets to understand how the proposed new oversight may impact the company’s operations.
• In Scharf’s opinion, shares of SQ are fairly valued and trade at a premium compared to PayPal Holdings, Inc (NASDAQ: PYPL) due to potential regulatory uncertainty relating to the BNPL asset class and Cash App fee structures.
• On Wednesday, SQ shares were trading lower by 0.05% at $61.53.