Summary In this article, I am going to explain Block's emerging businesses and how they can unlock value. Bitkey, C=, TBD, and MDK may be unheard of to investors but should be considered as long-term growth drivers. When investing in Block Inc, investors need to be aligned with the Bitcoin route the company is taking for long-term growth. These initiatives are quickly increasing the company's TAM. Investment Thesis Long-term investors in Block Inc. ( SQ ) need to take a stance on the company's emerging business units. Bitkey, C=, & MDK are Bitcoin-related ( BTC-USD ) companies, while TBD is a platform that is building the foundation for decentralized identity. What makes Block Inc. unique is its ability to innovate from within the company. It has done this already with its platform Cash App, which has now surpassed the original square business in quarterly gross profit. Investors should be cautious given that Bitcoin is in the early stages of potentially being regulated. But, in all, I believe that emerging businesses will be able to create substantial shareholder value in the long run by increasing addressable markets while reinforcing the company's closed-loop ecosystem strategy. Cash App: From Start-up to Growth As you may know, Block Inc's first core product was the Square POS system. But, in 2013 the company launched a project to build out a small internal start-up: Cash App. Cash App began as a simple P2P platform, but has since grown its product offerings significantly. In 2016, Cash App retained $5 in gross profit per customer and reached $47 per customer as of their 2022 investor day by launching products such as instant deposit, cash app card, direct deposit, Bitcoin trading, etc. These new products, network effects, as well as successful marketing campaigns, have driven incredible user growth over the six years shown below. In 2015, Cash App only had 1 million monthly transacting actives (note the importance of the terminology used ) - which I consider a start-up or perhaps a high-growth firm. Transacting Actives (Block Inc. Investor Presentation) Flash forward to 2022 Q4, Cash App's gross profit exceeded Square's gross profit for the first time in the company's history. In other words, the Cash App business is now an established company on a stand-alone basis. Q4 Results (Block Inc. Investor Relations) The New Start-Ups Block Inc. has four start-ups within its ecosystem, all with varying degrees of maturity. Over the long term, I expect a couple of these start-ups to follow the same trajectory as Cash App has done. I'm going to present them below in order of most mature to least mature. The benefit that Block Inc. has now, compared to earlier, is a larger amount of capital to deploy on developing ecosystems. As of Block Inc's investor day, they announced that the company was only spending Investment Criteria (Block Inc. Investor Day ) TBD TBD, Block Inc's most mature start-up, is led by Mike Brock. He has been active in the Cash App business and he was responsible for creating Spiral , which is an ecosystem responsible for supporting Bitcoin developers. I have not included Spiral in this analysis since it is non-profit. TBD is working on technology that enables users to have a decentralized identity on the web. TBD's mission is to build Web5: "Web5 is the banner for a set of new technologies that upgrade the Web with decentralized identity, P2P trust mechanisms, and a decentralized app layer. The term Web5 is a throwback that pays homage to HTML5, which was used to represent the last major effort to evolve the Web some 15 years ago." As of now, TBD project roadmap is currently 64% complete, and since they stand for open-source communication, investors and other stakeholders can follow their progress through the following link: https://areweweb5yet.com/ TBD Product Development (areweweb5yet.com) Decentralized Identifiers will allow web users to have one account or one unique identity for many different platforms. This implies that each individual will store and own their own data and simply move it from platform to platform. For example, imagine a world where you can easily switch from one music streaming platform to another by moving all of your playlists with the click of a button. Or imagine a world where you can move between different social media platforms and bring your friends along with you. These types of abilities are what TBD is enabling through its full stack of products shown above. TBD is aiming to be 80% complete within the next month! According to Emergen Research , the decentralized identity market size was $725 million in 2022 and they expect the market to grow at an astonishing 87.3% CAGR through 2032. The main growth driver for this blockchain-based technology is identity theft and security breaches. "With a decentralized identification paradigm, Personally Identifiable Information ((PPI)) is never duplicated or kept. Instead, a trusted source confirms the needed information without disclosing any personally identifiable information." Key Trends (Emergen Research ) The research report claims Microsoft ( MSFT ), Accenture, Nuggets, 1Kosmos Inc., among other firms to be major players in this industry so far. I believe that the research report overlooked Block Inc. due to the fact that TBD has not yet commercialized a product. But, since the market is still young and fairly fragmented I expect TBD to gain market share within the consumer segment of the market once they have a product ready. Block Inc has experience working with business customers through its Square product as well as with consumers through its Cash App product and their industry knowledge will serve as a building block for growing TBD going forward. Grand View Research expects this market to be worth $102 billion in 2030, Allied Market Research is expecting $77.8 billion by 2031, and MarketsAndMarkets is expecting $6.8 billion by 2027. This goes to show that it is difficult to estimate the growth in this market, so investors should take these projections with a grain of salt. But, the consensus is nonetheless that this industry will be growing incredibly fast over the next decade. Bitkey Bitkey is led by Jesse Dorogusker, who is also the CEO of Block's subsidiary Tidal. Jesse was previously the Director of Engineering at Apple for key products such as the iPhone, iPad, and iPod accessories. Bitkey is a hardware wallet product that allows users to store Bitcoin in a secure and non-custodial way (a.k.a a cold wallet). Furthermore, the hardware wallet itself is going to be coupled with an app where you can manage your finances as well as send cross-border payments using Bitcoin. Block is striving to make Bitkey as secure and easy to use as possible, which is why the company is also building a service in which you can recover your unique key if you happen to lose it. This is incredibly important to include in a hardware product - that is notoriously difficult to use - because it will drive fast user adoption among consumers who are not tech-savvy. Bitkey has now been sent out to 200 Block employees with varying technical knowledge, 19 different nationalities, and different phone operating systems (about 50/50 IOS & Android). This is how the product looks in use: Bitkey Product (Jack Dorsey Damus ) Jack Dorsey has been claiming on Damus that Bitkey "Feels really amazing. Especially the recovery methods." Business Wire predicts the hardware wallet market size will grow from $442.56 million in 2021 to reach $3.6 billion by 2031, growing at a CAGR of 23.7% from 2022 to 2031. IMARC Group expects the market to reach US $1.23 Million by 2028 and Valuates is expecting a market size of $1.67 billion by 2029. In other words, researchers have a stronger consensus of the growth in this industry. The Digital Trend mentions in its article Block: Reshaping The Future that the banking crisis during the past month may lead consumers to be less trustful toward the established banking system, similar to what happened after 2008. This leads me to believe that market growth for cold wallets could be underestimated, though it is difficult to put a figure on it. Once again, research reports overlook Block Inc as a player in this emerging market. Current market participants that the researchers find are, among others, Ledger, Trezor, KeepKey, and CoolWallet. From my intuition, market participants will be competing on ease of use, security, and price. As a large company, Block Inc. has a clear cost advantage in which it could sell the hardware at a loss and rely on recurring revenue streams for subscription services (similar to their Square revenue model ). As shown in the picture above, Bitkey can be unlocked with the consumer's unique fingerprint which exemplifies the company's focus on both ease of use and security. As for now, though, I believe it is too early to rate the performance of the product. In order to keep up-to-date with the newest developments, check out this link: https://bitkey.build/ C= C= is a Bitcoin-related startup that serves to increase the strength of Bitcoin as a payment method. C= is a lightning node provider , which means that it provides Bitcoin liquidity for those who want to send Bitcoin or Bitcoin sending over the lightning network. They make use of Block Inc's $133 million of Bitcoin (as of Q4 Shareholder Letter) in order to enable institutional customers as well as individuals to send Bitcoin quickly. In an interview C= lead, Nick Slaney, states "Right now we have about 8,000 Bitcoin...We're putting our Bitcoin to use and we're actually hoping to generate some revenue off it" C= currently has 1.3 trillion sats (satoshi) invested into its lightning node, which is equivalent to 13 Bitcoin or ~$387,000 . So, this amount makes up a very small portion of Block Inc.'s Bitcoin holding. C= Lightning Stats (Amboss) Nonetheless, C='s lightning node is already ranked the 123rd largest based on capacity (Amboss) , which is impressive considering the short amount of time it has been in operation. C= can generate profit from this lightning node by either forwarding payments or selling liquidity . Although the quick growth is exciting, the revenues generated from this node will most likely not be material to Block Inc in the foreseeable future. MDK The Mining Development Kit, similar to what it sounds like, is a project that is working on building its own Bitcoin mining semiconductor chips to serve as the foundation for a full suite of Bitcoin mining products. The philosophy behind this project is to decentralize Bitcoin mining by making it accessible and easy for anybody to use. MDK is still in its nascent stages, but it is worth mentioning due to the projected market size of Bitcoin mining hardware. Allied Market Research expects the Bitcoin mining hardware market to reach a total worth of $1.7 billion by 2031. The market growth for Bitcoin mining will most likely follow the cyclical nature of Bitcoin Mining revenues, which are shown below. Bitcoin Mining (Bitcoin Magazine) Risk The company sees value in Bitcoin not only due to its incredibly fast adoption but also its continued growth potential. Along with the quick adoption that Bitcoin has already experienced, a larger lack of trust in the established banking/payment system is another tailwind for the technology. Bitcoin Asset Class (Block Inc Investor Day 2022) These start-ups, though, do come with inherent risks with Bitcoin as a system for which to build the ecosystems on top of. Seeking Alpha lays out risks such as volatility, and the decentralized nature of the asset. These factors will lead to unpredictability for Block Inc in regard to building products and projecting revenue streams. For instance, I believe that the company may face several dilemmas in balancing the decentralized nature of Bitcoin while also being in control of the system. In sum, the evolution of Bitcoin regulation will be an important determinant of the new start-up's success: "The challenge and concern around Bitcoin regulation is how patchwork legislation across jurisdictions may hinder the growth and maturation of the crypto economy that is intended to be a borderless, open financial system." ( Source: Coin Telegraph ) Conclusion In all, Block Inc is investing for growth. By investing in these new technologies, the company will have an expanded TAM of only $1,422 - 1,792 million today, but a staggering $77,100 - 399,300 million ten years from now. TAM (millions, USD) Today 2031/2032 TBD $280 - 650 $71,800 - $394,000 Bitkey $547 $3,600 MDK $595 $1,700 Source: Author's estimates The TAM that Block Inc is trying to capture is especially staggering when compared to the company's market cap. Data by YCharts Furthermore, I believe that these start-ups will significantly reinforce the potential for Block Inc to expand its closed-loop system outside of just Cash App and Square. Bitkey & MDK will allow users to efficiently mine, store, and send Bitcoin all within the same system. By bypassing card networks such as Visa ( V ) and Mastercard ( MA ) as well as banks, Block Inc will not need to pay transaction fees when customers, for example, send remittance payments to each other. The company has already built a closed-loop ecosystem with Square and Cash App, in which Cash App customers can pay Square merchants through the app. The emerging Bitcoin start-ups will be a further enabler of closed-loop ecosystems as the company builds out remittance services using Bitcoin on-off-ramps and potentially integrates these products with Cash App and Square. Ark Invest clearly displays the potential margin benefits for Block Inc if it had a fully closed-loop digital wallet ecosystem. Big Ideas 2023 Ark Invest Ark calculates the net take rate by dividing Block Inc's Gross Payment Volume ((GPV)) by its gross profit on transactions. For the full-year 2022, the company had a GPV of ~$203 billion and a gross profit on transactions was ~$2.337 billion lending a net take rate of 1.15%. If Block Inc instead had all transactions in a close loop, its gross profit on transactions would more than double to $203 billion x 2.6% = $5.287 billion. Ark mentions in their footnote that they expect Block Inc to share the expanded take rate with merchants and consumers in order to improve the ecosystem for its users. Therefore, it is more reasonable to expect that the net take rate will lie around 1.5-2% in the long run instead of 2.6%. Increasing gross profit margins coupled with increased GPV (note that GPV was ~$84 billion in 2018) could result in outsized returns for investors. For these reasons, I believe Block is a strong buy.
