Indeed, since Block announced the Afterpay deal back in August, its share price has collapsed 54 per cent with investors concerned about slowing growth and the impact of fading government stimulus to combat the COVID-19 pandemic.
Jamie Hannah, deputy head of investments and capital at VanEck, pointed to rising bond yields as a persistent problem for companies like Block.
Mr Hannah said the buy now, pay model will be under pressure once interest rates increase and the likelihood of repayment falls.
“Like many technology companies of recent years, there has been a big push for revenue growth at the expense of profit,” Mr Hannah said, adding there is a real risk to companies that aren’t generating a profit when markets turn south.
“Block currently makes credit card readers that plug into mobiles amongst many other features,” he said.
“By purchasing APT, Block is expanding its offering into the finance space by offering alternatives to paying ‘now’. This will no doubt come at a risk of overextending credit in a rising rate environment.”
Trading under the ticker SQ2, an estimated 20 per cent of Block’s total market is represented through CHESS Depository Interests (CDIs) on the ASX.
Under the deal, Square offered 0.375 of its shares for every Afterpay share.
Investors could either receive their Afterpay shares in an equivalent number of NYSE-listed Square stock.
Or they could receive shares in Square, which has now re-branded to Block, that are listed on the ASX via a CHESS Depository Interest (CDI). CDIs allow foreign companies to have a secondary listing in Australia and often trade in line with their offshore counterparts.
As an investment case, Block has two main parts to its business. Its Seller business manages payments and lends money to merchants, while its Cash App business allows consumers to transfer, spend and invest money.
Thanks to the slick technology, Square could attract a wave of younger consumers and tech businesses comfortable with operating their finances through smartphone apps.
As it stands, the company has 4 million merchants and 40 million Cash App active users on the platform.
Ms Liu said Tribeca, which had a substantial holding in Afterpay, sold out of the buy now, pay later business once the Square deal was announced.
“A lot of Afterpay investors have faced this challenge because Block is a very different type of business,” she said.
Mr Hannah, who also sold out of Afterpay once the deal was announced agreed. “We’ve made good returns out of APT, but in the current environment we’re happy to lock in our return and look to better investments,” he said.