Summary The primary intention behind Cash App Savings is to attract more direct deposits and more deeply imbed the Cash App into consumers’ financial lives. Cash App Savings offers lucrative insights into users’ spending intentions, which can feed into targeted advertising solutions in the future. The presence of consumer savings within the Cash App is conducive to users purchasing products/ services using Cash App Pay / Cash Card, generating interchange fee revenue for Block. Cash App Savings does not pay interest, which could impede growth given the highly competitive nature of the industry, and the high-inflationary environment. The Cash App is merely playing catch up to competitors in the space; it does not have a first-mover advantage here. Block's new strategy is promising, but not competitive Block's (SQ) Cash App continues to evolve as its suite of financial services expand. From trading Bitcoin (BTC-USD) to filing taxes, the company is striving hard to deeply imbed the Cash App into consumers' financial lives. A key growth strategy the fintech giant is using is expanding into core banking services, and cross-selling its features to induce deeper integration. Its latest advancement is the Cash App Savings feature, striving to increase direct deposits into the app, and taking a step closer towards its e-commerce ambitions. Block is well-positioned to capitalize on the secular growth trends of the fintech industry, though the company will need to step up the competitiveness of its offerings to more aggressively penetrate the market. Nexus Research has a "hold" rating to Block. In January 2023, Block introduced Cash App Savings. Cash App's new savings feature is automatically present in the 'Money' tab of the app, without consumers needing to create a new account. The seamless savings experience can induce users to increasingly perceive Cash App as a place for storing wealth. The primary intention behind Cash App Savings is to attract more direct deposits, and more deeply imbed the Cash App into consumers' financial lives. cash.app An important point to note right off the bat is that Cash App Savings currently does not pay any interest. The inability to earn interest undermines the appeal of the feature, given the highly competitive landscape of the financial services industry to attract depositors, and the current high-inflationary environment making interest-paying financial products/ services even more essential. Given Block's long-term banking ambitions for the Cash App, there is indeed a good possibility the company could start paying interest on savings in the future as competition intensifies for depositors' money. Block has not disclosed the level of direct deposit inflows since the launch of the Savings feature. However, on the Q4 2022 earnings call , CFO & COO Amrita Ahuja proclaimed: We continue to build out our banking offering by introducing savings, which has been one of our fastest-growing products on Cash App. While "fastest-growing" sounds alluring, the executives did not offer details on how it is perceived to be one of their "fastest-growing products". Over the next few quarters, investors will observe whether it has meaningfully encouraged more users to deposit more money into their Cash App accounts from other stores of wealth. Nonetheless, the Cash App's growing suite of banking facilities should be conducive to more direct deposit inflows over time. In fact, Block is already cross-selling its other banking products through Cash App Savings, namely the Cash Card. It enables Cash Card users to turn on 'Round Ups' in the Cash App, whereby extra change from purchases flows directly into their savings. Greater use of the Cash Card generates more revenue from interchange fees. cash.app More money stored in the Cash App in the form of savings offers more capital to facilitate Block's lending activities, such as through Cash App Borrow, its Buy Now Pay Later (BNPL) service AfterPay, or Square loans to businesses. Greater ability to lend out more funds can subsequently generate more interest income for the company. Cash App Savings also brings it a step closer to its e-commerce ambitions, conducive to advertising revenue. Cash App ecommerce On the Q3 2022 earnings call , CEO Jack Dorsey shared that the company is "still early in [its] journey to transform Cash App into a commerce destination that bridges [their] seller and consumer ecosystems". E-commerce platforms inherently offer great advertising opportunities, just look at Amazon's flourishing advertising business . While Block executives have not explicitly stated any digital advertising endeavors, it can be presumed to be the next logical step given the evolution of other e-commerce platforms. Last year, the tech giant introduced the Discover tab within the Cash App, where users can explore brands and their products, and look for special deals/ discounts. The Discover tab also includes a search engine allowing users to search for specific products that they are after, enabling Block to grasp consumer intent, conducive to effective ad solutions in the future. Furthermore, a lucrative feature of Cash App Savings is that users can define the purpose of their savings, such as travelling, birthday gifts, or a new phone. This offers lucrative insights into users' spending intentions, which can feed into targeted advertising solutions in the future. Block could indeed show ads relevant to users' saving purposes in the Discover tab of the Cash App, conducive to effective conversion rates for merchants given that users have already expressed interest in their products/ services. Offering high-converting ad solutions can indeed create an attractive advertising revenue stream going forward. cash.app Even if users don't end up purchasing the advertised products/ services, the presence of their savings within the Cash App is conducive to users purchasing the desired product/ service using Cash App Pay / Cash Card, generating interchange fee revenue for the tech giant (subject to the merchant accepting the payment method). Counteractive factors Absence of interest payments on savings While the introduction of Cash App Savings is a step in the right direction to induce more direct deposit inflows, the fact that it is not interest-bearing can be a serious impediment to its growth potential. CEO Jack Dorsey has been adamant about improving financial literacy across marginalized communities, which makes it ironic that his company is encouraging consumers to deposit money into a savings feature that doesn't pay any interest while facing a high-inflationary environment. The fintech industry is a highly-competitive space, with companies striving hard to attract depositors away from traditional banks. For context, top competitor PayPal had also launched an in-app savings account in September 2021, currently offering an interest rate of 3.75% APY, proclaiming it to be 12x the US national average. If the Cash App truly wants to become a force to be reckoned with in the digital banking industry, it will need to start offering competitive interest rates on savings features, to meaningfully increase direct deposits into the app. Innovation not bold enough Digital savings accounts, round-ups and purpose-driven savings are nothing new in the fintech world. The Cash App is merely playing catch up to competitors in the space. It does not have a first-mover advantage for any of these features. Competitors' customers that are already well-versed into their apps through similar features are unlikely to migrate to the Cash App amid the launch of this Savings component. Therefore, Cash App Savings is more likely to act as a customer retention strategy, as opposed to an aggressive customer acquisition strategy. While first-mover advantages can be effective at acquiring market share, it does not necessarily mean that players like Cash App can't capture market share from competitors. Though in order to seriously challenge competitors, Block will need to get bolder with its innovations and strategies. A unique edge that the company holds over its competitors is that it runs two ecosystems simultaneously, accessing both sides of commerce equation. Specifically, Block overlooks a large community of merchants through the Square ecosystem, and an alluring base of consumers through the Cash App ecosystem. Additionally, Block could leverage the power of AfterPay, the BNPL company it acquired in 2021, to foster a connection between the two ecosystems and augment the commerce experience for both consumers and sellers, to really build a competitive moat around its platform. Dorsey touched upon the potential of such integrations on the last earnings call : In terms of the ecosystem integrations, the number one, we're focused on, obviously, is AfterPay is the connection between Square and Cash App. We're still early in the product integration, but the place to look is obviously going to be in Cash App in the Discover Tab in marketplace. We believe that we started -- we're pretty early in just what this area will do. Right now, it looks like a fairly simple search. And I think the UI [User Interface] is a little bit off. But we're going to continue to iterate as quickly as possible to make sure that we meet the opportunity, which is pretty massive for us. While the company seems to be moving in the right direction, it will need to step up its game in order to aggressively penetrate the mobile payments/ banking industry, by offering more distinctive services in a timely manner. Overall thesis In 2022, Cash App ecosystem contributed 61% to total revenue, though it is important to note that 67% of Cash App revenue derived from the Bitcoin feature. Nonetheless, transaction-based revenue and subscription/ services-based revenue are becoming larger components of Cash App revenue year-over-year, as Block continues to establish the banking features of the Cash App. The growing suite of banking services, and deeply integrated cross-selling opportunities, offers continued revenue growth potential. Moreover, Cash App's move towards e-commerce is conducive to lucrative advertising revenue, further augmenting revenue growth prospects. Block shares are currently trading at a Price to Sales (P/S) multiple of around 2.5x, marking a significant contraction from around 15.5x in December 2020, as the stock market downtrend over the past 16 months has particularly punished tech growth stocks. The P/S ratio incorporates investor sentiment towards all of Block's revenue segments collectively, such as Square ecosystem and TIDAL ecosystem. Nevertheless, the market may be under-appreciating the Cash App's revenue growth potential, particularly through advertising solutions going forward as it transforms into an e-commerce destination, which could make the current P/S multiple an attractive entry point. Though investors should note that the poor performance of cryptocurrencies like Bitcoin will have also contributed to the stock's multiple compression, given that Bitcoin trading constitutes a large portion of the company's Cash App revenue, which could continue to weigh on the stock, depending on how cryptocurrencies perform going forward. Furthermore, investors should also note that Block became a loss-making company again in 2022, delivering a loss of over $540 million for the period. On the latest earnings call, the executives outlined their investment framework, committing to invest in growth opportunities in a cost-effective and disciplined manner going forward, to improve profitability. Block currently trades at a forward P/E multiple (non-GAAP) of almost 45x, while the 5-year average is almost 144x. The stock also trades at a premium relative to the sector, which has a median forward P/E multiple (non-GAAP) of 20x. Hence, the stock remains relatively expensive on a forward P/E basis. On the Q4 2022 earnings call, CFO Amrita Ahuja shared: We expect Cash App margins to expand, which is a continuation really of some years now of improving profitability for the Cash App business. We expect Square margins to be more consistent year-over-year, partly due to some of the moderation of growth related to macro impact Furthermore, as the Cash App transforms into an e-commerce destination, the ability to sell advertising solutions in the future should also augment profit margins. However, intensifying competition could pressure margin expansion going forward. As mentioned earlier, the fintech giant will likely have to start offering competitive interest rates on its Cash App Savings feature going forward, in order to continue retaining and acquiring customers, which would indeed compress profit margins. Overall, Block continues to be well-positioned to capitalize on the secular growth trends amid commerce evolvements, both through its Cash and Square ecosystems. Though as mentioned earlier, the company will need to step up its innovation and market penetration strategies to effectively capitalize on the growth opportunities ahead. Intensifying competition may also pressure profitability going forward. Even though the stock has a seen a considerable contraction in the forward P/E perspective, the stock remains expensive. On a broader macro note, tech growth stocks like Block had witnessed significant upside during the era of ultra-loose monetary policy conditions. As the Fed shifts from Quantitative Easing to an unprecedented period of Quantitative Tightening to fight inflation, tech growth stocks could continue to face pressure. Nexus Research assigns a "hold" rating to Block. Summary The primary intention behind Cash App Savings is to attract more direct deposits, and more deeply imbed the Cash App into consumers' financial lives. Cash App Savings offers lucrative insights into users' spending intentions, which can feed into targeted advertising solutions in the future. The presence of consumer savings within the Cash App is conducive to users purchasing products/ services using Cash App Pay / Cash Card, generating interchange fee revenue for Block. Though Cash App Savings does not pay interest, which could impede growth given the highly competitive nature of the industry, and the high-inflationary environment. Even though the introduction of Cash App Savings is a step in the right direction, the company will need to step up its innovation and market penetration strategies to effectively capitalize on the growth opportunities ahead. Block continues to be well-positioned to capitalize on the secular growth trends amid commerce evolvements, both through its Cash and Square ecosystems. Though increasing competition may pressure profitability, and the company will need to step up its innovation to bolster the competitiveness of its services. Nexus Research assigns a "hold" rating to Block.
