Imagine a bustling digital town square. On one side of the square, you have thousands of small shopkeepers, from coffee carts and boutique clothing stores to independent contractors. They used to struggle with clunky, expensive cash registers and credit card machines. Then, a company came along and gave them a simple, elegant little white square device that plugged into their phone or tablet, allowing them to accept credit cards easily. This is the heart of Block's Seller ecosystem. It's the “Main Street” part of their business, providing the tools for small and medium-sized businesses to operate and grow.
Now, look to the other side of the square. You see millions of people walking around, using their phones to instantly send money to a friend for lunch, receive their paycheck two days early, buy a fraction of a stock, or even purchase Bitcoin. This is the Cash App ecosystem. It's the consumer-facing, fast-growing, and trend-driven side of the business. It’s a digital wallet, a stockbroker, and a crypto exchange all rolled into one app.
Block, Inc., which trades under the ticker symbol SQ, is the architect and owner of this entire digital town square. The company was famously co-founded by Jack Dorsey (also a co-founder of Twitter) and was originally named Square, after its iconic first product. In 2021, it changed its name to Block to reflect its broader ambitions, which now include music streaming (Tidal), decentralized finance projects, and a major focus on Bitcoin.
For an investor, understanding SQ means you can't just look at the whole “town square.” You must evaluate the reliable, established business of the shopkeepers (Seller) and the exciting, but far more unpredictable, activities of the citizens (Cash App) as two distinct, though interconnected, entities.
“The great personal holdings have been made by people who bought and held, but that's the tortoise. The hare is the guy who jumps around from thing to thing and thinks he's smarter than the market… I don't think the tortoise is so dumb.” - Charlie Munger
A company like Block can be a classic trap for an undisciplined investor. It has a compelling growth story, a visionary (and famous) founder, and operates in the exciting “fintech” space. A value investor, however, must cut through this noise and focus on the underlying business fundamentals. For SQ, this means asking some tough, Munger-esque questions.
1. Is There a Defensible Moat? A key pillar of
value_investing is finding businesses with a durable
competitive advantage. SQ has potential moats, but their durability is debatable.
The Seller Ecosystem: This business has high switching costs. Once a coffee shop integrates its entire sales, inventory, and payroll system into Square's platform, it's a significant hassle to switch to a competitor like Toast or Clover. This is a reasonably strong moat.
The Cash App Ecosystem: This business relies on network effects. The more people who have Cash App, the more useful it becomes for sending and receiving money. However, this moat is arguably weaker. Competitors like PayPal's Venmo, Zelle, and even Apple Pay offer similar services, making the network less exclusive than, say, Visa or Mastercard's.
2. Where is the Real Profit? Block's headline revenue numbers can be wildly misleading. This is because they include Bitcoin revenue. When a user buys $100 of Bitcoin on Cash App, Block reports that $100 as revenue, even though it immediately uses almost all of it to buy the Bitcoin for the user, earning only a small fee. A value investor must ignore this “pass-through” revenue and focus on gross profit, which shows how much money the company actually keeps from its services. Dissecting the gross profit from the Seller business versus the Cash App business is the only way to understand the company's true earnings power.
3. Rational Capital Allocation or Distracted Leadership? Value investors pay immense attention to how management invests the company's money. Block's leadership, particularly Jack Dorsey, has made bold bets.
The Afterpay Acquisition: Block spent nearly $29 billion to acquire “Buy Now, Pay Later” company Afterpay. A value investor must ask: was this a synergistic purchase that deepens the ecosystem, or did they overpay at the peak of a market frenzy for a business facing intense competition and regulatory scrutiny?
The Bitcoin Bet: The company has used its corporate treasury to buy billions of dollars worth of Bitcoin. While this could be a visionary move if Bitcoin's value soars, it is fundamentally a
speculative act. It introduces a level of volatility and risk completely unrelated to the core business of processing payments. A value investor must separate the performance of the underlying business from the performance of its Bitcoin holdings.
4. Is it Within My Circle of Competence? Benjamin Graham advised investors to stick to what they understand. Block's Seller ecosystem is a relatively straightforward business-to-business software company. Cash App, with its deep integration into crypto and its ever-expanding suite of financial products, is far more complex. The company's future plans for decentralized services (TBD) add another layer of complexity. An investor must honestly ask if they can reliably forecast the long-term cash flows of such a rapidly evolving entity.
Let's compare two investors looking at SQ: Growth-Focused Gary and Value-Valerie.
The news breaks that Cash App's monthly active users grew by 20% and that the price of Bitcoin is soaring. SQ's stock jumps 15% on the news.
Growth-Focused Gary sees this and gets excited. He thinks, “Wow, incredible user growth! And their Bitcoin bet is paying off! This thing is going to the moon!” He buys the stock at its new, higher price, caught up in the positive narrative and momentum. He's focusing on revenue growth and user metrics.
Value-Valerie sees the same news but reacts differently. She pulls up SQ's latest financial report.
She ignores the Bitcoin-inflated revenue and goes straight to the gross profit numbers. She notes that while Cash App's gross profit is growing quickly, the more stable Seller ecosystem's profit growth is slowing down due to a weaker economy.
She reads the conference call transcript and notes that management seems to be spending more time talking about Bitcoin than about improving the profitability of their core payment services.
She calculates her own estimate of what the Seller and Cash App businesses are worth, based on their ability to generate cash. She finds that even with optimistic assumptions, the current stock price is far above her estimate of
intrinsic_value. The market is pricing in decades of flawless execution.
She concludes that there is no
margin_of_safety at the current price. She decides to wait, adding SQ to her watchlist. She'll only become interested if the price falls significantly, providing the buffer against uncertainty that her value investing discipline demands.
Valerie isn't against technology or growth. She simply insists on paying a rational price for that growth and demands a buffer in case the future isn't as rosy as the headlines suggest.