- JMP Securities analyst David Scharf maintains Block Inc SQ with a Market Perform.
- On Monday, Australian regulators disclosed plans to introduce new rules for the Buy Now Pay Later (BNPL) asset class that would treat the industry as a standard consumer finance provider.
- The proposed BNPL regulatory framework in Australia follows several moves announced by regulators in other countries. Scharf expects the pace of regulatory proposals to increase as BNPL volume grows in other markets.
- The proposed rulemaking may particularly affect Afterpay and other home-grown BNPL firms like Zip, which have an outsized share of their revenue from the Australian market.
- While Block does not break out BNPL revenue by region, in 2021, roughly 45% of underlying sales financed through Afterpay were from Australia and New Zealand.
- Assuming this correlates to revenue and is relatively applicable today, this would imply that roughly $365 million of SQ’s revenue in 2022 was derived from BNPL operations in these two countries, along with $265 million in gross profit representing 5% and 10% of SQ’s overall revenue and gross profit respectively.
- The broader potential risk to SQ could be an emerging wave of stricter oversight across many markets that 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.
- The analyst sees shares as fairly valued, trading at a premium to PayPal Holdings, Inc PYPL and potential regulatory uncertainty relating to the Buy Now Pay Later asset class and Cash App fee structures.
- Price Action: SQ shares traded lower by 0.05% at $61.53 on the last check Wednesday.
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