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Expert, Harrison Moot: Block – an Interview with Equity Mates Podcast

Listen to Harrison's breakdown of Block.

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Bryce (01:23):

Welcome to the Equity Mate Summer series proudly brought to you by share’s. Over 12 episodes we’re deep diving into some of the most exciting, interesting and well-known companies from Australia and the us. Each episode we’re joined by an expert to help us unpack the key metrics, the bull case and the bear case. My name is Bryce and as always, I’m joined by my equity buddy Ren, how are you going?

Ren (Alec) (01:42):

I’m very good. Bryce great to be here. This is the only episode we’ve split into two parts, but it was worth it. This was a cracking interview.

Bryce (01:50):

It was a cracking interview. We are joined by Harrison moot from TDM Growth Partners. But a quick shout out to Sharez who are proudly supporting the Equity Mate summer series and who have also been awarded the 2022 canstar Innovation Excellence Award with the judges saying the platform is unique with a significant wow factor as it reduces barriers to entry for new investors. And the platform is easy and approachable with their auto invest feature. So you can truly execute dollar cost averaging across Australia, US and New Zealand markets. Use promo code grow when you sign up to the shares. These platform for $10 into your account ready to invest. We do not get any commission for that is purely for new users, promo Ts and Cs apply. Download the SSIS app or visit ssis.com au to learn more. And a quick note, we are licenced, but any information is general advice only do your own research.

And this is for entertainment and education purposes only. But yes, without further ado, we’ve had our conversation on Block Ren, but let’s get in our expert Harrison, moot from TDM Growth Partners. Harrison, welcome. Thank you for having me. So we are here to talk about Block and you cover block at TDM. And so we’re going to do the same four questions that we’ve been doing each episode and it always starts with how to analyse the company. What are the key metrics that you are looking at? What are the key metrics for the company when you are starting to build an investment case for Block?

Harrison  (03:15):

Yeah, it’s a good question. Actually going through the process made me realise it’s not an easy question. So Block previously known as Square, it’s definitely worth acknowledging upfront. Like this is a complex business. It’s something I look at businesses day in, day out. We’ve been covering this for over four years now and it took me a long period of time to get across and understand the business. So if you’re looking at this afresh and you’re thinking this is complex, this is hard, you’re not alone. It’s a big business to tackle, but our view is that it’s definitely worth the time. So Block has three core businesses, square, which is the merchant payment and services business. You’d probably be familiar with that. That’s like when you go to a cafe or a small business, you tap your credit card. So that’s their first and primary business. Second is Cash App. Cash app’s relatively new. It’s about three years old in its current form. They’ve had a few iterations, but in its current form today. And that’s primarily a, think of it as like a neobank app for mainly unbanked and underbanked consumers in the us. So a little different to Australia where everyone can access a bank account in the US for about 40 to 50 million adults. It’s actually hard, if not impossible for them to get access to a bank account, 40 to

Ren (Alec) (04:39):

50 million. Wow, that’s like a meaningful percentage of the adult population.

Harrison  (04:43):

It’s a huge number. So in the US they have what they call the alternative financial services industry. So that’s payday loans, check Cashs. There’s an entire industry which has grown up around that fact and Cash app came along, they were no fees. They basically enabled these people to access the modern financial world through this app. So that’s Cash app number two. And then the third business, which you’d also be familiar with, which they acquired last year was afterpay. So the buy Now pay later business. There’s probably a few listeners on the show that love and are familiar with that name.

Bryce (05:23):

Yes.

Ren (Alec) (05:24):

Yeah, there’s one person in the room that is love and is familiar with it.

Harrison  (05:28):

So they’re the three core businesses and they’re the ones that you need to focus on when you’re breaking down the business. Where I think the confusion comes in is you have five what the business calls initiative. So this is title the music streaming business, and maybe it’s for another time why we actually think that acquisition made a lot of sense, but we think it does. And then the other four related to Bitcoin. So they’ve got Bitcoin mining, bitcoin wallets, TBD, which is a decentralised Bitcoin exchange going to be honest, it’s sort of beyond my technical skis to understand really what that business does. And then Spiral, which is a not-for-profit whose mission is really just to advance Bitcoin as a future digital currency. But I think for understanding the business as an investor, you can push those five.

Ren (Alec) (06:17):

There’s one other isn’t there? Or

Harrison  (06:21):

So Weebley they acquired, oh, that was probably four or five years ago now.

Ren (Alec) (06:26):

Yeah, the reason I bring it up is because Bry and I were trying to put a bow on all of the businesses and how you would sum them all up and we couldn’t quite fit Weebley into that.

Harrison  (06:34):

So I think Weebly came about, their business was initially in-person card payments. So I run a cafe, I want to accept card payments, and that’s where the little white dongle started and then they realised they needed a solution. As businesses moved online, increasingly and especially after Covid businesses, omnichannel, I may sell things in store, but I also want to sell things online. And so they acquired Weebley and that gave them immediate sort of capabilities in this space. Great,

Ren (Alec) (07:02):

There we go. That’s the bow that we were missing.

Harrison  (07:05):

So today that would really fit within the square business. So you’ve got these three core businesses and then in addition to I guess the number of businesses you have, you have different revenue types. So the first is payments revenue. They earn about 2.5 to 3%. It’s different between different geographies, but we’ll talk about the US because that’s about 97 of the business, 2.5 to 3% every time somebody makes a payment through their processing. So that’s the first type of revenue. The second is software revenue. So in addition to providing payment capabilities to those merchants, they provide software to run their online store like Weebly, they might pay $50 a month for that. They do loyalty, they do marketing, they do staff management. There’s a whole ecosystem which they’ve built and that’s software revenue. Thirdly, you then have credit type revenues. So they make loans on both the consumer side, so some of those users we’re talking about for cash up.

And also on the square side, if you need a loan to buy a new coffee machine, they enable that. In addition to that, they also have trading revenues. So they enable buying and selling of Bitcoin, and that’s another type of revenue which is also recognised. So when you look at their financial statements, you’ll see transaction revenue, software revenue, bitcoin revenue. So it gets quite complex quite quickly, particularly when you break that down for each of those three business units. The summary of all of that is the cleanest way to look at and evaluate the business over time is to look at gross profit for each of those segments. And the best way to think about gross profit is it’s the revenue or the gross profit that accrues to the business after all the variable costs that they pay away. So in payments, yes, they charge court circa 3%, but they only really take 1% of that.

So the margin on that business is circa 35%, whereas with software it’s much higher at 80%. And so when you look at gross profit for each of those segments, it effectively abstracts away that complexity and gives you a better look into the underlying performance of the business. Yeah, nice. And is it a good picture? Yeah, so the three segments, you’ve got Square, which is doing about 2.7 billion and this is all US dollars, but doing about 2.7 billion of gross profit growing circuit, 20%, this is, sorry, this is for the coming financial year, 2022 Cash app is growing a little bit faster, close to 30% and also doing 2.7 billion of gross profit. And then Afterpay is doing circa 600 million in gross profit and flat year on year. And so we’ll come to some of the concerns people have about the business, but a lot of that, or some of that is in relation to Afterpay. And why is that flat year on year? We have a view on that. All of that rolls up to at a group level, it’s about 6 billion of gross profit growing 25% year on year. Can’t

Ren (Alec) (10:08):

Complain with that. No. Yeah, it’s pretty impressive. And we were talking about the revenue growth just before the break. It is just an amazing story year after year, some seriously impressive numbers. So let’s start with the bull case. What does the business need to do to build a sustainable competitive advantage in these three businesses that we’re talking about? And what do you need to believe as an investor, I guess, to belong this stock?

Harrison  (10:33):

Great question. Maybe I’ll break it into where do I think the competitive advantage of the business comes from and then if they are successful on executing on this vision, what does that bull case look like from a valuation and returns perspective? So for the competitive advantage in the business, we really see it as coming from two distinct parts. So firstly is their ecosystem approach to building businesses. And we touched on it briefly before, but back in, I think it was circa 2011, maybe a little bit earlier. When Square first started, it was with, I dunno if you recall those little square white dongles you could plug into your headphone jack on your iPhone and that enabled you to accept debit or credit card payment.

Ren (Alec) (11:21):

Yeah, I still recall my dad bought one of those recently and plugged it into his phone and his mind was blowing. What was he doing? Walking around the office setting payments? No, he was selling shirts at a charity store. Cool.

Harrison  (11:36):

It’s probably a classic use case. So they started and going back to there, the mission of the business, and you’ll see this go through, everything they do is economic empowerment. And so on the square side, the merchant side that initially started because a huge amount of micro and small merchants couldn’t access the ability to accept credit and debit card payments in the us a bank would say, you’re too risky or you’re only going to process 50 grand of payment volume a year. So it’s not worth their time and effort. And what Square figured out was that they could make a elegant solution, they could make it easy to adopt and they could effectively bring this whole SMB merchant group into the modern economy and have the ability to accept payments. They started out with just this simple dongle. Not much else was around that. And I think at the time people were sceptical of what does a long-term trajectory of this business look like? Amazon could come into the space, which they did offer the same capabilities. I think they had a triangle based really, I never knew that.

Ren (Alec) (12:42):

Okay, square better shape than a triangle. You got to say

Harrison  (12:46):

What they’ve done over time is they have, and this is led by Jack Dorsey, they have a very product-led design-centric approach to building products and businesses. Something which we hear a lot when speaking to Formers speaking with people who’ve come from their product org is there’s huge amount of empathy for solving their customer’s pain problems. So they started off with the dongle and then they thought, well, what we’re really trying to do is help merchants make more sales. So what else can we offer them? What else can we create and develop to make their life easier? So that expanded into software. I mean we talked about Weebly, the ability to spin up an online store, they expanded into marketing software. So how do you send emails or texts to remind people about promotions or what have you? And over time, if we fast forward almost 10 years later, they offer banking products, full suite team management payroll.

There’s this incredible ecosystem that merchants now have access to run and grow their business. And what that means is they’ve been able to grow up with the company. So over time the average merchant size has grown a lot and as they grow, they adopt more products and services, which drives more revenue for the business, but it also weaves them into the fabric of that ecosystem. So they’re much less likely to churn. That ecosystem approach started off in Square. And then the newer business, which is Cash App similarly started off just as peer-to-peer money exchange. So another oddity of the US banking system is it’s very difficult and slow to transfer funds if you can access it at all. And so how Cash App started was simply just a peer-to-peer money exchange, the ability for me and you to send money to each other and do that instantly, that had incredible traction because there is this large group of unbanked underbanked consumers in the us and over time that’s evolved to now offering the ability to buy stocks, the ability to take out a loan, the ability to have a debit card, rewards an incentive.

So it’s a whole ecosystem for consumers. We think that side of the business is much earlier on and we’ll come to the 10 year vision and what that might look like. But what this ecosystem approach does is weaves them into, whether it’s on the merchant or the consumer side, weaves them into the fabric of their life in a much deeper way. And so they have much more loyal, much stickier and ultimately more revenue generating customers related to that ecosystem approach. Something we think about a lot is personal and mobile computing. Before Apple came along was this unapproachable, quite nerdy unsexy business. Nobody looked at like an IBM laptop or an IBM personal computer and thought like, oh that’s cool, that’s sexy, I want to have that out on the laptop. So sorry, that laptop out on the train so people can see it. And we think as Apple has done for that industry block Square Cash app doing for the financial services industry.

So think about when you go to a cafe, how sort of aesthetically pleasing the square products are. They’re very design centric business and if you go, I’d encourage you to go have a look on the Cash app side. Some of the branding they do is completely different to what you’d ever see from a bank. So they got recently Kendrick Lamar and Ray Dalio to do an advert together. Together, which when we saw it pop up, I was like, well I can nerd out on this. Two people that I really like and not a combination that you’d ever expect. You’d never expect Bank of America to have Kendrick Lamar talking about running a business with Ray Dalio. What that’s done is it has this incredible brand affinity for the merchants and the consumers who use it, particularly in the US and you can see that on Twitter, they do this thing called Cash App Fridays where they basically do money giveaways through the app. There’s a huge amount of love you can custom design your own debit card. And so people share that online. I think there’s, I’d have to come back to you on the stat, but over a thousand songs, predominantly rap songs which talk about Cash app. Right, okay. I think there is a song called Cash App on Spotify and so it’s become as much a cultural movement as a financial services business and that to us is pretty exciting.

Ren (Alec) (17:30):

The other one that we were talking about before the break that we don’t really know a lot about but we’ve heard about is Venmo is that’s their big competitor.

Harrison  (17:38):

So there’s really two primary peer-to-peer players in the us And this is actually a good segue to where we see the second main competitive advantage, which is in network. And so you’ve got two primary peer-to-peer players, that’s Venmo and Cash app. And you could do this really interesting exercise, I dunno if you use Google Trends at all. So you can go onto Google Trends type in Cash app and Venmo and you can see the relative penetration across the states in the US and you can go back over time. I think it would’ve been in 2017, cash app primarily started in called the Urban Southeast US and Venmo is much more coastal, coastal and wealthier on average. And you can sort of do an annual look of the relative strength in each state and you can see those network effects expand over time. And so initially call it in 2018, cash out penetration in New York might’ve been 5%. I think in the last few weeks it just tipped over 50%. So now that’s become a Cash app state as per the Google trend data. So now

Ren (Alec) (18:49):

It’s bigger than Venmo in Google Trends, it

Harrison  (18:53):

Is on Google Trends. They’ve got similar levels of consumers today, roughly 50, 55 million monthly active users. But the demographics are very different. So for Venmo it’s primarily coastal and wealthier, but for Cash App it’s typically lower socioeconomic, but because they have less alternatives, it means they’re much more engaged. So the Cash app users are much more likely to have it as their primary or near primary checking account or sort of financial app. Whereas Venmo is much more casual. We might use BME or something like that in Australia. Yeah,

Ren (Alec) (19:35):

We were saying because Cash App not in Australia, just in the us correct, yeah. Beam. Did the banks see Venmo and Cash app over in the US and decide that they’re going to build their own before they could come?

Harrison  (19:49):

I’m not sure it will be. I mean something we think about is how will Cash app, we assume it will at some point, how will they play a role in Australia because the banks in Australia do a much better job of serving consumers than they do in the us. We don’t have this large unbanked or underbanked population. So their strategy will have to be different to expand into Australia. And whether that’s through more of products like buy now, pay later with Afterpay, we think that will probably be the wedge that they’ll use to come to Australia.

Ren (Alec) (20:24):

Yeah, that’s interesting. Yeah.

Harrison  (20:25):

Can they offer a different product or service which is unique or differentiated? Yeah, the network effects side, and this is probably when we think about our real focus at TDM is the five to 10 year view of how businesses will evolve and network effects when companies them can be the most powerful of competitive advantages. Most of the call it top 10, top 20 businesses list of businesses today all have some element of network effects as it stands today. Cash app we talked about has this peer-to-peer network effect. Similar maybe to how we would think about, I dunno if you remember Vibe, Viber, WhatsApp.

Bryce (21:10):

WhatsApp,

Harrison  (21:10):

Yeah. Yeah. So early it was the calling service. Yeah, it was an early competitor to WhatsApp and over time. Yeah, exactly.

Ren (Alec) (21:19):

Yeah, no idea.

Harrison  (21:21):

So I was just thinking about this actually going through the reflection is close to everybody today uses WhatsApp to some degree. You have some highly engaged users who might use it for business. They might use it because they have friends or family overseas and then I might use it once a month, but almost everyone will have the app and it shows the strength and that’s in peer-to-peer messaging shows the strength that network effects can have both within countries and globally. And so Cash App has similar dynamics for money in the US where it’s effectively a similar dynamic of peer-to-peer money. They’ve been able to acquire users for about $10 each, so a $10 CAC and it can take banks on a similar basis, two to $300. So they’ve been able to grow the business to what’s about 50 million monthly active users in the US really cheaply just because of these network effects. And maybe we’ll come into the detail just on what that five to 10 year looks like in that section. But the next stage for the business we believe is how do they bridge the ecosystems, the merchant ecosystem they have of two to 3 million merchants and call 50 million monthly active users. How do they bring them together? And we believe Afterpay was a key reason for that. Well, I

Bryce (22:42):

Do feel like Afterpay is a glaring omission from your bull case at the moment. So

Ren (Alec) (22:47):

No, no saving the best to last.

Harrison  (22:50):

Maybe just on rounding off the bull case, it’d be remiss not to do what does the return profile look like? You can have a great business, but that doesn’t necessarily make it a great investment. So the business today is doing for this financial year circa 6 billion of gross profit growing about 25%, but let’s just say for the next five years that gross profit compounds at 25%. So that’s roughly a three x. So gross profit will go from six to 18 billion. If you look at peers today and given the breadth that they cover across both merchants and consumers and buy now, pay later, it does require a bit of triangulation to think of what’s the most comparable business. But two in the US which we look at and which you’d probably be familiar with is Shopify. And then there’s also Toast, which does merchant and software, but specifically for restaurants, those businesses are growing 20 to 30% and trade on 11 to 13 times gross profit. So we’ll be a little bit conservative and we’ll say 10 times gross profit for block in five years. So 10 times the 18 billion is 180 billion of enterprise value. And that compares today to an EV of about 35 billion. So obviously very round numbers, but it would indicate over a five year period there’s the opportunity for a five x return if it plays out like that. And so for a business of this scale with network effects, we think that’s pretty exciting.

Bryce (24:30):

So that’s the bull case. There’s always some concerns when you’re building an investment case and you definitely need to understand the risks and what could go wrong. So when you look at block, what are you most concerned about? What would be the bear case for this company?

Harrison  (24:46):

There’s three primary concerns that investors have and I’ll give you our perspectives on those and whether or not we disagree with them, but it’s really exposure to Bitcoin, the risk around buy now, pay later, which is funny, they spent $30 billion on it less than 12 months ago and now it’s a primary risk that comes up. And thirdly is I’ll call it the recession risk. So firstly with Bitcoin bloc’s founder is Jack Dorsey. He is heavily associated and a big proponent of Bitcoin, the bearded wizard of the Bitcoin world, given Jack’s association with Bitcoin. And the initiatives, which block itself has what we were talking about at the start of the episode with Spiral and TBD and Bitcoin hardware block has become itself to be heavily associated with Bitcoin. And if you go back over the last two and a half, three years and you plot the Bitcoin price over the block share price, the correlation is very tight. And so the perspective is that block and Bitcoin, their fates are sort of tied together and we think this is part of the opportunity that Bitcoin is less than 2.5% of gross profit for their company today. So there’s this perception reality mismatch where the economic exposure to Bitcoin is effectively close to nil, but it has this large perception exposure. All

Ren (Alec) (26:18):

This makes me think is don’t rebrand in a bull market block kind of screwed up changing their name from square to block and Facebook screwed up changing to meta. Both of them aren’t, their economics are tied to their old businesses, but the perception is tied to the new business.

Harrison  (26:35):

I think that’s right in the block case, Facebook is spending billions of dollars on the metaverse and making it come around still

Ren (Alec) (26:46):

39 billion in CapEx a year, 10 billion of that to the Metaverse. The majority is still not going there. It’s true. Anyway, different conversation

Harrison  (26:55):

And with blocks case. So they’re spending less than 3% of their cost base a year on Bitcoin related initiatives. So a much more manageable number than the 25 odd percent coming from meta.

Ren (Alec) (27:08):

Anyway, I interrupted you there. You were talking about the Bear case and the Bitcoin exposure,

Harrison  (27:13):

Bitcoin exposure. So we think that’s really just a perception reality mismatch. And so that’s something we’re less concerned about. And I think one thing that we’re reticent to do, so Jack Dorsey founded Twitter. He then founded Square Square, then launched another business called Cash App, which is a multi-billion dollar business. This is a guy who’s founded three multi-billion dollar businesses in his time and he has a view that Bitcoin could be very important to the future of money and the future of commerce. And if you think that block is a financial services business, then whether or not Bitcoin does become that future digital currency is potentially a pretty big deal. And so we get comfort to some degree that block is leading a lot of the initiatives in the Bitcoin space. And so in the event the Bitcoin does become more of a dominant digital currency, the native currency of the internet, then block will be well positioned to, if not do well, to lead that evolution of commerce or digital currency. And for 3% of opex it feels like it feels like a good way to hedge your risk. So

Ren (Alec) (28:31):

That’s Bitcoin to other risks for the Bear case. Let’s get to what was the hottest ticket in town the last couple of years that has gone maybe a little bit cold buy now, pay later,

Harrison  (28:44):

So buy now, pay later. So block, as some of you might’ve remembered, acquired after pay in mid 2021 for 29 billion US dollars that was in script rather than cash. It’s interesting to note, the market cap of the business today is about $35 billion. So how things have changed in only a short sort of 12 to 18 months. The concern that people have around buy now, pay later I think comes down to two things. Firstly is the credit risk going into a recession. So Afterpay provides effectively short-term credit or short-term financing to consumers for small ticket purchases. And the concern that people have is as we go into a recession, consumers will stop paying back these loans and it’ll lead to large losses if not a slowdown in the business. Our view on that is one of the very valuable things about Afterpay model is they underwrite each new purchase and so they can respond very quickly to changing sort of macro environment and they can pull back how much credit they’re willing to provide on a very active basis.

So we’ve actually seen over the last two quarters, even though there has been a softening of the macro environment, that their loss rates have improved. So they have the ability to taper that back over time. The second risk is this massive increase in competitive intensity that happened sort of the 12 months following. I mean it was competitive at the time, but it increased massively in the 12 months following their acquisition. So you had players like Klarna come into the space, PayPal launched their own product, which was pay in four. Zip was obviously already there, but

Ren (Alec) (30:38):

Affirm, affirm, yeah, they were there. But yeah,

Harrison  (30:41):

There was this increase in competitive intensity. And part of the reason why we hadn’t invested in Afterpay previously is that it was unclear to us how the industry sort of rationalised when there was a pullback, when funding of the space became a little more what we thought was rational. And now that Afterpay is a smaller segment of a much larger profitable and well capitalised business, and it is at the end of the day, I think we come back, there is a lot of product love around Afterpay. The reason why it grew as quickly as it did was because merchants found it an incredibly valuable product in attracting a new segment of users driving revenue and then consumers loved using it, they preferred using it to credit cards. So that value prop still remains for both parties. And we think that as part of block it now gives it an added degree of resilience. If there is a pullback, if there is a macro recession, they’ll have the capital and the scale to work through that period.

Ren (Alec) (31:52):

Those were the first two risks. Bitcoin buy now, pay later, and then the third risk. The third

Harrison  (31:59):

Risk was macro and recessionary environment. The perception is, and the perception is correct that on the merchant side, square services primarily SMB merchants, so these might be farmer’s markets, these might be smaller cafes, they are increasing over time the average size, but on average smaller merchants. And then on the consumer side, these are lower socioeconomic typically unbanked or underbanked consumers in the US and again, they are expanding out of that demographic. But as of today, that’s the vast majority. And the concern that people have is, well, as we go into a recession, how are those businesses and individuals going to be impacted? On the consumer side, you’re more likely to lose your job if unemployment increases or have your hours reduced. So there’s the concern that both of those businesses will be disproportionately impacted if there is a weaker macro environment. There is a lot of truth in that concern.

And the way that we think about the risk is it’s always relative to the return profile you are taking and also the time profile or the time that you have to make that investment. The timeframe that we care about is the five-year period. And our view is okay, there may be a difficult 12, 18, 24 months ahead if there is a significant recession that plays out through the real economy and that will affect those merchants and consumer groups. But block, given its scale, given the role that it plays within those merchants and consumers’ lives will probably be able to increase its share or increase its engagement and then as the macro normalises, then it’ll be in a stronger, if not the same position out the other side. Yeah, nice. And so we think those fears are probably overplayed at the moment, which isn’t to say that it could be a difficult 12 to 18 months, but if you are patient and you have the ability and the emotional fortitude to look through that, then we think it could be interesting.

Bryce (34:08):

Well, let’s close out by having a look at the long-term plans. TDM Love thinking five, 10 plus years. So if everything goes according to plan, if Dorsey, if Bitcoin’s not an issue, if they can merge their apps, if Afterpay, where does block sit in 10 years time?

Harrison  (34:25):

So we think, and this is the really exciting thing for Block, we have this concept that we talk about internally called vitality. And Vitality is really a business’s ability to push into new areas, new products, new geographies, new verticals, and expand the business horizons over time. The best example of that today is probably Amazon. They started off selling books and now they basically do everything. Another good example is Apple. They started off in personal computing and now they’re pushed into mobile and have a huge amount of businesses in there. We think Block is one of those businesses with a very high degree of vitality. We think that’s largely a result of the culture which Jack Dorsey promotes within the business. He gives the leaders of those businesses a lot of autonomy to take them in the direction which they want. And they also have a culture of innovation allowing new products to be spun up, seeing if they work.

If not, that’s not a bad thing. The more important thing is that they’re trying new initiatives. So Cash App actually came about as a hack week project and now it’s a 2.7 billion business. And probably the most valuable part over the 10 year view, the analogy we think is closest to how the business might look are the super apps in China. So you have WeChat and Alipay being the two biggest ones, and I dunno if you’ve ever been to China and used either of them. No. It’s this incredible experience where your entire commercial life effectively runs through that app. So you want to order food, you do it within WeChat, you want to buy a bus ticket, you do it within WeChat, you want to purchase for something at a store, you do it within WeChat. And so we think Cash App has the ability to, in many ways evolve to play that role in the US and potentially globally. We think it’s the team given that focus on innovation and vitality, we think it’s the team to execute on that. And that probably takes us to Afterpay and why we think it might actually prove to be a very interesting acquisition and probably a very valuable acquisition to make.

Ren (Alec) (36:45):

Yeah, I’ve been holding out for this. So what’s the story here?

Harrison  (36:49):

The fun fact about Afterpay is that it sends about a million leads per day to its merchant partners.

Ren (Alec) (36:56):

Wow. Wow.

Harrison  (36:57):

So if you go within the app, it’s more of a shopping and discovery tool than it is a buy now pay later business in many respects. And that’s incredibly valuable to those merchant partners who adopt Afterpay. They get not all the 1 million leads per day, but they get leads coming from Afterpay. And so if they’re able to incorporate that within Cash app, which has about four times the number of users, then the value of those leads, the number of those leads that they’re sending to merchant partners effectively bridges the ecosystem and creates two-sided network effects where merchants want to come onto the platform because they get access to these consumers. Consumers want to come onto the platform because they get access to buy now, pay later, a whole host of other features as well as some of these rewards and discounts on the merchant side. And the interesting thing about payments is that Visa and MasterCard have had an effective oligopoly on the payments network for many years. Now You do have American Express, which is slightly different, but where the real potential value might come in is their ability to bridge the ecosystems and become what’s called a closed loop payments network.

Ren (Alec) (38:12):

Right, okay. So not run payments through those two

Harrison  (38:17):

Through the other networks. That’s correct. Right. And so if you make a payment, and typically they charge 3%, but only receive 1%, they may charge from a competitive basis. So you’d prefer to use Square, let’s just say they charge 2%, so it’s still cheaper for the merchant, but now they have double the effective take rate that they did previously.

Ren (Alec) (38:38):

Now you did flag that you had a vision for title. Well, TDM have a view about where title could be. And I know it might not be core to the thesis here, but I do want to ask about it because Bryce and I were joking about it when we were talking about the company. Neither of us have ever used Title. It was an interesting acquisition when it happened. Maybe Dorsey just wanted to meet

Harrison  (39:04):

Now sits on the

Ren (Alec) (39:04):

Board. Yeah, yeah, yeah. What’s the view, where does Title fit into this

Harrison  (39:09):

World? So I actually, I wrote a blog post on this, I can’t remember the name, but if you go to the TDM website, it’ll be on there somewhere.

Ren (Alec) (39:16):

We’ll include the link to that in the show notes to this episode.

Harrison  (39:19):

Great. If you think back to Block’s primary mission of economic empowerment, firstly they worked with merchants who’d been historically underserved by the financial industry. Then they worked with consumers who’d been underserved. Artists are also a demographic which have historically been underserved. And so I think Jack saw it firstly as an opportunity to bring them payments and software capabilities to help them manage, grow, and run their business. Artists are effectively small businesses themselves. And so you can see how they have the core capabilities to help that demographic. I think secondly, and probably more interestingly is going back to that comment that there’s a thousand songs out there with Cash App in it. There’s a couple which are called Cash App. Jack appreciates the power of culture and the power of brand in business. And by buying title it gave the business a relationship with these artists.

And so if you think about driving adoption of Cash App, cash app has these cash tags, and so similar to an email address for sending emails, you can have your cash tags. So mine might be Harrison 100. And so you can type in Harrison 100 and send 50 bucks, but they provided the ability for these artists to leverage that as their first port of call. So if you have people like Jay-Z who say, I use Cash App, that’s my preferred payment provider. The brand pool that has the cultural significance that has is massive. And so they have, they’ve partnered with Serena Williams, a few other sports people and artists,

Ren (Alec) (41:12):

Kendrick.

Harrison  (41:13):

Kendrick, thank you to drive that brand and that association. And so I think that’s why I was, the acquisition was made. And if Jack, you’re listening to this, I’d love you to read the article.

Ren (Alec) (41:26):

Here’s the question though, Harrison, have you ever listened to a song on title?

Harrison  (41:29):

I actually have not.

Bryce (41:33):

All right. That’s your homework.

Harrison (41:35):

Too much of a Spotify user.

Bryce (41:36):

I know. I know. Another great business. Well, a good place to leave it. Fascinating business. And if it does really play out over the next 10 years, then it’s going to be a great story to watch unfold. So thank you so much for spending the time this morning, Harrison, really do appreciate coming in. Thanks. And yeah, check out TDM website if you’d like to see some of Harrison’s work. So thank you very much. Thanks Harrison.

Harrison (42:00):

Thanks guys. Heaps fun.

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