Afterpay's Peak Season Performance Eases Credit Fears, Yet Block's Structural Risks Remain Elevated

What happened

Block's Afterpay unit announced that 96% of U.S. Pay-in-4 customers paid off Black Friday and Cyber Monday purchases early or on time, portraying responsible BNPL usage during a high-volume period. This data, from a recent Business Wire article, aims to counter credit risk narratives by highlighting consumer discipline. However, the DeepValue master report underscores Block's growing on-balance-sheet consumer and SMB lending, with credit risk flagged as a major concern in filings. While the high payment rate is encouraging, it represents a limited snapshot that doesn't address underlying delinquency trends or economic sensitivity across the broader loan portfolio. Filings show Block is increasingly holding loans for investment, amplifying exposure to potential losses despite this positive datapoint.

Implication

The 96% on-time payment rate suggests BNPL can be used responsibly, potentially reducing immediate credit risk perceptions and supporting Block's narrative. However, this figure is from a peak shopping season and may not reflect default rates in a recession or across the entire loan portfolio, limiting its predictive value. Block's financials indicate rising loan balances on the balance sheet, increasing vulnerability to economic downturns and requiring vigilant monitoring of credit metrics. Regulatory overhangs, including BNPL scrutiny and other legal issues, remain unresolved and could impair growth or profitability independent of payment performance. Thus, while the news is favorable, it doesn't alter the need for cautious investment given the company's elevated risk profile and stretched valuation.

Thesis delta

The Afterpay data provides a positive counter-narrative to credit risk concerns, but it does not shift the core thesis. Block's valuation remains stretched relative to DCF estimates, and regulatory, credit, and bitcoin risks continue to justify a 'WAIT' stance. Investors should treat this news as incremental rather than transformative, maintaining focus on broader risk factors.