Subscriber Update on Block Inc. 2032s
•January 16, 2026
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Why It Matters
Understanding Block’s evolving credit profile is crucial for bond investors and high‑yield analysts, as the company’s strong liquidity and Rule of 40 trajectory could reclassify its risk premium. The discussion is timely because the upcoming 2026 convertible and senior note maturities will test whether Block can sustain its growth while balancing shareholder returns and creditor protection.
Subscriber Update on Block Inc. 2032s
Below is an update from our previous Block, Inc. brief covering the 2032s:
Investment Thesis: Rule of 40 Momentum Validates Credit Thesis
Block’s credit story has shifted. What appeared shaky six months ago now looks durable. The company’s Q3 2025 results showed gross profit climbing 18% year over year, with both the Square and Cash App divisions humming simultaneously. More importantly, management laid out a specific path to Rule of 40 in 2026, not vague aspirations but actual targets: 17% gross profit growth paired with a 20% adjusted operating income margin. The company has already hit the Rule of 35 through Q3, suggesting the jump to 40 next year is within reach, not fantasy.
The balance sheet has gotten materially stronger since August. Net debt sits negative at roughly $1.1 billion as of Q3, a cushion most high-yield issuers would envy. Gross leverage dropped to 2.0x from 2.2x in just one quarter. Free cash flow generation keeps accelerating, hitting $1.5 billion over the trailing twelve months with guidance pointing toward nearly $2 billion for the full year 2025. Management is throwing this cash at buybacks, having repurchased $1.5 billion in stock over the past year and just expanded the authorization by another $5 billion.
We will provide a more direct conclusion at the end of the report on the XYZ 2032s. Operationally, there were positive developments in the last two quarters of the year. Cash App proved this in Q3, posting 24% gross profit growth with 58 million monthly active users and gross profit per user up 25% year over year to $94. Square’s gross payment volume accelerated to 12% despite operational headwinds from a processing partner switch that temporarily dinged margins. The company navigated these challenges without breaking stride on credit quality. That matters for bondholders.
Operating Performance: Cash App Drives, Square Stabilizes
Q3 delivered results that made sense, though equity traders got distracted by noise. Revenue came in at $6.11 billion, below the $6.31 billion estimate, mostly due to timing issues with gross payment volume recognition at Square. That’s not the story. Gross profit of $2.66 billion beat expectations, and growth reaccelerated from Q2’s 14% to 18% year over year. Adjusted EBITDA hit $891 million with a 31% margin, revealing the operating leverage built into this platform: incremental gross profit drops straight to the bottom line.
Cash App generated $1.62 billion of that $2.66 billion in gross profit, roughly 61% of the company’s profits. Monthly active users hit 58 million in September and continued to climb to 58.7 million in October. But raw user count masks the real story. What matters is how deep the platform hooks users. Inflows per transacting active user rose 10% year over year to $1,366, a sign that Cash App is morphing from a peer-to-peer payment tool into people’s primary financial relationship. Commerce volumes expanded 16% over the last twelve months, validating this shift.
Cash App Borrow is worth isolating. Loan originations exploded 134% year over year in Q3, hitting $22 billion annualized. Here’s what’s interesting: the company maintained stable loss rates (24% net margins in Q3 versus 23% a year back) while scaling at this pace. Block moved most Borrow originations to Square Financial Services, its in-house bank, during Q2 2025. Owning the bank charter means better control over underwriting, faster product iteration, and no middleman fees. Post-purchase Buy Now Pay Later on the Cash App Card is scaling too, approaching $3 billion in annualized originations by early October. The product sits natively within the Cash App ecosystem, driving network effects that competitors can’t buy.
Square painted a mixed picture in Q3. Gross payment volume accelerated to 12% year over year, beating the 11% estimate and improving two points sequentially. This happened despite one fewer trading day in the quarter. Food and beverage volumes jumped to 17% growth from 10% a year prior, a signal that discretionary consumer spending remains strong. International volumes grew 25%, now representing over 20% of total Square volumes, so geographic diversification is real.
But gross profit growth slowed to 9% year over year from 11% in the prior quarter. Management blamed two factors: a processing partner change that temporarily widened the gap between gross payment volume and gross profit, and a hardware mix that was lighter on margins. The processing change is now fixed, suggesting the hit was temporary, not structural. Hardware mix is noisier to predict, tied to merchant adoption cycles and competitive dynamics in point-of-sale equipment. Hardware is a small piece of Square’s profit, though, and excluding it, gross profit grew at healthier mid-teens rates.
The Rule of 40: From Aspiration to Reality
Block’s November investor day was the watershed moment. Management didn’t wave hands about “executing our vision.” They gave numbers. The Rule of 40 in 2026 means that gross profit growth plus the adjusted operating income margin as a percent of gross profit exceed 40%. Their 2026 target: 17% gross profit growth to $11.98 billion, plus a 20% adjusted operating income margin, yielding a Rule of 40 score of 37%. The shortfall from 40 reads as conservative, not overreach, given the company has consistently beaten guidance in recent quarters.
The three-year outlook to 2028 projects roughly $15.8 billion in gross profit, $4.6 billion in adjusted operating income, and $5.50 in earnings per share. That math implies mid-teens gross profit growth, 30% operating income growth, and low 30% earnings growth. The arc is aggressive but not delusional. Block grew gross profit at a 30% compound annual rate from 2020 through 2025. Moderating to mid-teens as the base scales is sensible, not retreat.
Three pillars support this path. First, lending gets bigger. Block expects lending to generate north of $4 billion or 25% of gross profit by 2028. Cash App Borrow and Afterpay have demonstrated they can scale while managing credit losses, and the Square Financial Services bank ownership gives Block control over economics. Second, operating expense leverage emerges as a percentage of gross profit, with sales and marketing, product development, and general administrative expenses all shrinking as a share of revenue. That leverage flows directly to operating income expansion. Third, geographic and vertical expansion within Square remains underpenetrated, particularly outside the U.S. and among larger merchants.
Block introduced a new cash flow metric at investor day that adjusts free cash flow for settlement timing and capital deployed into lending. The idea is to show true cash generation after funding loan growth. For 2026, Block expects this adjusted figure at $2.4 billion, scaling to roughly $4 billion by 2028. The jump from today’s $1.5 billion isn’t magic. It reflects profitability improvement, plus lending businesses maturing and generating positive cash returns as the back book seasons, offsetting new origination investment.
Liquidity and Capital Structure: Fortress Position
Block’s balance sheet is in rare territory for a high-yield name. $8.3 billion in cash and short-term investments against $7.3 billion in total debt as of Q3 2025. Net debt negative at $1.1 billion means Block is technically a net lender, strange for a growth fintech. Toss in $775 million revolver availability and $983 million on the BNPL warehouse facility, and total liquidity exceeds $10 billion.
The maturity wall is not a problem. $575 million of 0% convertible notes come due in May 2026, potentially repayable in cash or convertible, depending on the stock price at maturity. The next real maturity is $1 billion of 2.75% senior notes in June 2026, then $575 million of 0.25% convertibles in November 2027. The bulk of the debt stack: $1.2 billion of 5.625% notes due 2030, $1 billion of 3.5% notes due 2031, $2 billion of 6.5% notes due 2032, and $1 billion of 6% notes due 2033.
Block upsized a $2.2 billion debt offering to $2.2 billion in August 2025, $1.2 billion in 5.625% notes due 2030, and $1 billion in 6% notes due 2033, after investors demanded more than the initial $1.5 billion target. Proceeds were used for general corporate purposes, including refinancing, acquisitions, capital expenditures, and working capital. The company has historically used debt capacity opportunistically, and August’s issuance likely covered the May 2026 convertible maturity while keeping powder dry for initiatives.
Interest coverage strengthened as EBITDA outpaced interest expense growth. Adjusted EBITDA to interest coverage exceeded 13x on Q3 trailing twelve-month math, down from 16.2x a year prior, despite higher absolute debt levels. The decline reflects higher rates on new issuance, not eroding profitability. Net leverage sits negative, and gross leverage is around 2.0x, comfortable within Block’s stated financial policy of maintaining a strong balance sheet to fund organic growth and opportunistic capital moves.
Capital Deployment: Aggressive Buybacks Signal Confidence
Block’s capital priorities flipped toward share repurchases eighteen months ago. The company bought back $1.5 billion of stock over the trailing twelve months, 24.6 million shares at an average price in the low to mid $60s. This consumed essentially all free cash flow over that period, signaling management’s conviction that the stock trades well below intrinsic value. November’s decision to expand the buyback authorization by $5 billion, bringing total remaining capacity to roughly $6 billion, reinforces the bet.
The aggressive buyback creates an interesting tension for bondholders. Returning $1.5 billion to equity holders reduces the cushion available to creditors and nudges leverage ratios higher. But buybacks happen only if management believes free cash flow is durable and the balance sheet can handle both buybacks and debt service. Expanding the authorization to $6 billion suggests this isn’t a one-time opportunistic move but a multi-year commitment. At roughly $1.5 billion annually, the authorization has four years of runway.
Block says capital priorities include reinvesting in the business, maintaining a strong balance sheet, opportunistically buying back shares, and potentially acquiring assets to fill strategic gaps. The company executed roughly a dozen deals over the past several years, including the transformational $15 billion Afterpay acquisition in 2022, mostly financed in stock to preserve the balance sheet. **Future acquisitions are likely to be smaller, tuck-in moves that augment capabilities rather than transformational swings, though management hasn’t ruled out larger deals if the opportunity fits.**
The May 2026 convertible maturity presents a straightforward choice. The conversion price is likely out of the money given stock performance, so conversion probably won’t happen. Block can repay from cash, which would reduce gross debt and tweak leverage metrics slightly. Or refinance in the bond market and extend maturities at current rates. Given the fortress liquidity and the maturity size relative to the overall balance sheet, repayment from cash seems likely, preserving maximum strategic flexibility.
Competitive Positioning: Widening the Moat
Block transformed from a point-of-sale hardware disruptor into something messier and stronger. The company now operates two ecosystems, Square for merchants and Cash App for consumers, that increasingly overlap and create network effects competitors can’t easily replicate. Square serves over 4 million merchants globally with integrated software for inventory, scheduling, payroll, and marketing beyond just payment acceptance. Cash App hit 58 million monthly active users who can send to peers, invest in stocks and Bitcoin, access Borrow credit, and buy now pay later.
The ecosystem overlap creates multiple moats. Merchants using Square see customers paying with Cash App, which lowers interchange and improves unit economics. Consumers paid via Square direct deposit or cash tips into Cash App become stickier users, adopting more financial products. The flywheel accelerated over the past two years as both sides scaled and integrations deepened.
Competition is real. In merchant acquiring, Block fights traditional processors like Fiserv and FIS, newer players like Stripe and Adyen, and banks with embedded payment capabilities. In consumer fintech, Cash App faces PayPal and Venmo, legacy banks, neobanks like Chime, and point solution providers in lending and investing. Block has stayed ahead by focusing on underserved segments, delivering superior user experiences, and moving quickly to address unmet needs.
PayPal is the relevant investment-grade comparison. PayPal has a larger market cap, higher EBITDA margins, and an investment-grade rating that saves roughly 100 basis points on borrowing costs. Block’s growth rate eclipses PayPal’s. The margin gap has shrunk over the past three years as Block has scaled and focused on profitability. Expect this narrowing to continue, with Block potentially eliminating single-digit percentage point margin gaps by 2028 if execution holds.
Risk Factors: Execution, Regulation, and Competitive Intensity
Block’s credit case rests on assumptions worth interrogating. First, the company must grow gross profit, mid-teens even as the revenue base scales toward $12 billion in 2026 and $16 billion by 2028. This demands sustained Cash App user growth, deeper merchant penetration at Square, and successful execution on Borrow and Afterpay. Growth faltering would strain the Rule of 40 math and could force management to slash investments, triggering a negative spiral.
Second, lending businesses must scale without credit deterioration that eats into margins. Cash App Borrow has maintained stable loss rates through Q3 2025 despite 134% origination growth, but the credit quality of incremental borrowers has not been tested in a real economic downturn. Block underwrites using proprietary real-time Cash App data, which may offer unique insights but creates model risk if those data relationships break during stress. A jump in credit losses could force tighter underwriting, lower originations, and slower growth in what’s become a key profit driver.
Third, competitive intensity could spike, putting pressure on margins. Apple and Google have distribution advantages that could make sustained Block growth difficult if they compete harder in payments and fintech. Traditional banks could get savvier digitally, eroding the differentiation that let Block steal market share. Regulatory changes around data privacy, consumer lending, or interchange could reshuffle the competitive landscape in unpredictable ways.
Fourth, macro headwinds hit both sides of the business. Weak consumer spending would pressure Cash App engagement and volumes. Small-business distress would hurt Square’s merchant retention and same-store sales. Block has weathered economic volatility, with gross profit growing through the pandemic and during monetary tightening, but a sharp recession would test downside scenarios more harshly than history suggests.
Finally, the Rule of 40 execution risk is real. Block has consistently beaten its own guidance, but the 2026 and 2028 targets represent a material step up in ambition. Operating leverage requires disciplined expense management and continued productivity in sales and marketing, product development, and general admin. Slippage could disappoint and pressure the stock, making the aggressive buyback look ill-timed and forcing a pivot back toward deleveraging.
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