Please refer to our disclaimers, which can be found in the footnote of this page and here.

Contents

• Contents
• Performance
• Portfolio Discussion — Block
• Our Block Investment Journey
• Business Overview
• Business Quality & Cost of Capital
• Why do we own it?
• Strong “one stop shop” value proposition
• Emerging moats that deepen with scale
• Attractive unit economics
• Long duration runway for growth
• Founder driven company
• Key Risks
• Valuation
• Block Footnotes
• Business Update

Performance

1Q 2025 performance was -0.4% gross / -1.6% net (vs. the MSCI ACWI at -1.3%). Since inception (1 Jan 2019), the portfolio has compounded at +18.0% gross / +15.1% net (vs. the MSCI ACWI at +11.9%), representing +6.1% gross (+3.2% net) annualised outperformance. The top contributors in the quarter were Alibaba, Pinduoduo, Visa, Okta, and cash. The top detractors were Alphabet, Salesforce, and Block. We started the quarter with 14% cash and ended with 13%.

As usual, there were only a handful of trades this quarter. We sold circa half the Alibaba position (at ~$148) and made some incremental additions to Microsoft, Alphabet, Salesforce, and Block. The Alibaba position was driven by a material change in the risk-reward given the strong share price performance. It is too early to tell if our thesis on the core eCommerce business is playing out (although there are positive indications). Instead, it was AI-hype that drove the stock price.

Post quarter-end, there was a material downturn in the market as President Trump laid out his tariff plans. We will not attempt to offer any insight here as we have none. Not only can we not predict the tariff outcomes, even if we could, we cannot predict what is already priced in. Instead, we are focused on the next decade with companies that should be able to perform irrespective of the short-term tariff outcomes.

Through 7 Apr 2025, YTD performance was -7.6% gross / -8.8% net (vs. the MSCI ACWI at -11.0%). During the sell-off, we added to Salesforce, Alphabet, Meta, Microsoft, and Block. As of 7 Apr 2025, cash was 7%. To note, during this period, there was very substantial volatility, particularly in the overnight trading markets. The overnight markets are extremely illiquid during such times with very wide bid-ask spreads. Because of our small size, we were able to buy some positions at 4-9% discounts overnight relative to the next day close. For example, Alphabet at ~$139 (vs. $149 close), Salesforce ~$228 (vs. $244 close), Microsoft ~$344 (vs. $358 close), and Block ~$47 (vs. $50 close). We are grateful for the capital additions we received during the market weakness.

Returns Summary and Portfolio Statistics

(all returns are annualised in USD)

Portfolio Discussion — Block

Our Block Investment Journey

Block is a business that we have followed for a long time, but our interest peaked on the back of a deep dive into the payments industry in 2020, where we sought to understand the duration of the secular tailwinds and how the power in the value chain was evolving.

Alongside the card networks (see our note on Visa), we were drawn to next-generation merchant acquirers and payment facilitators that could integrate broader value-added services to achieve product differentiation (such as Square, Adyen, Stripe, and Toast), as well as companies with strong consumer relationships (like Apple Pay). Among the next-generation merchant acquirers, we favoured those focusing on SME customers (Square/Stripe) over those serving larger enterprises (Adyen). This preference stemmed from competition in the SME segment being less price-oriented. While larger enterprises are price-sensitive and have the scale to use multiple payment providers, even routing transactions in real time to optimize costs, SME customers typically depend more on their acquirer and prefer one-stop-shop solutions with value-added services. We were also attracted to solutions offering horizontal and holistic omni-channel capabilities built on modern, well-integrated architecture. This contrasts with many legacy incumbents who grew through acquisitions, resulting in disparate back-end systems that couldn't fully capture economies of scale. Block stood out because it possessed these desirable characteristics while also maintaining strong consumer relationships through Cash App. The potential to merge its consumer and merchant ecosystems could create a structural advantage. Without this potential, Block likely wouldn't pass our quality filter (as exemplified by Toast).

Our initial analysis of Block in 2021 concluded that the stock was significantly overvalued. We made our first investment in early 2022 after the share price had fallen considerably. Since then, Block's stock has been highly volatile with dramatic swings in valuation. While we don't typically trade actively around our positions, these substantial price movements have led us to both add to and reduce our holding at various times.

In retrospect, our investment has not been successful. As of quarter-end, the current investment multiple is only 1.04x (1.3x for our clients since starting the business). More significantly, we've been wrong about several key aspects. Management has stumbled in executing both the core Square product strategy and the Afterpay integration. Additionally, the merger of the Square and Cash App ecosystems has progressed more slowly than expected. While we maintain our position at the current valuation, we need to see specific proof points in the coming quarters — Block is on the chopping block.

Business Overview

Block operates two core businesses: Square and Cash App. Square serves as a next-generation, vertically integrated payments platform that combines value-added software services for retail business management into a comprehensive one-stop solution. Cash App functions as a neobank, delivering consumer payments, banking, and other financial services.

Square's history is rooted in disruptive innovation. Its smartphone-compatible card reader offered small merchants an affordable way to accept credit cards. This represented disruptive innovation because existing systems, while more sophisticated, were too expensive for micro-merchants and relied on personnel-intensive sales strategies. Square took a different approach, focusing on advertising, marketing, and word-of-mouth promotion. As a first mover, its strong brand helped achieve low customer acquisition costs. This strategy allowed Square to capture an untapped market segment that incumbents had overlooked. Since then, Square has expanded both upmarket and online, broadening its offerings to include point-of-sale ("POS") hardware, software (invoicing, payroll, team management, etc.), and financial services (lending, cards, etc.). The company serves as the merchant of record and payment service provider, with a banking license for merchant deposits and loans. Square earns revenue primarily by taking a percentage of the transactions that run through the platform. It also earns subscription fees on some products as well as fees on loans offered to its merchants.

Cash App is a mobile banking platform with ~57m monthly users that enables peer-to-peer transfers and broader consumer financial services. Like Square, Cash App began as a disruptive innovator by serving the underbanked, a customer segment larger banks avoided due to lower profitability. The company achieved this through a low-cost viral distribution model. Over time, Cash App expanded upmarket to serve more affluent customers. The platform generates revenue primarily through transaction fees, including instant deposit fees and interchange fees on Cash App Cards. Additional revenue streams include loan fees and Bitcoin trading fees. In 2025, Square's licensed banking subsidiary will begin serving as the lender for Cash App Borrow loans.

Block acquired Afterpay in 2021, a leading buy-now-pay-later ("BNPL") platform, in a major all-stock acquisition representing just under 20% of the post-acquisition equity value. While Block overpaid for the asset, this was offset by using its very overvalued stock as currency. The deal was marginally accretive to our base case IRR at the time (though we didn't purchase stock until early 2022). The strategic value lies in Afterpay's potential synergies with the Square and Cash App ecosystems, particularly its ability to bridge them by connecting both merchants and consumers. Though this integration has been slower than expected, there are now emerging signs of progress.

Business Quality & Cost of Capital

Initially, we scored management 3/3 based on strong execution and significant alignment through Jack Dorsey's founder-led leadership. However, execution has deteriorated over the past two years. Management lost focus on the core, product development slowed, go-to-market effectiveness declined, and the Afterpay integration fell short of expectations. These missteps allowed competitors (like Toast and Clover) to gain market share in the merchant segment, while compliance issues have hampered Cash App. Dorsey has since implemented promising changes — refocusing corporate strategy on the core, restructuring the organization, and recruiting back key product talent. We're monitoring these changes closely, looking for concrete evidence of improvement over the next 12 months.

Why do we own it?

Strong “one stop shop” value proposition

While Square offers a range of services, customers primarily choose it for its POS hardware and software. Its key value proposition is a one-stop-shop integrated offering that delivers a seamless customer experience with straightforward pricing. For SMEs, having a single solution for POS, staff scheduling, invoicing, customer data collection, and access to financing is invaluable, letting them focus on driving sales. However, customers note several drawbacks: limited online capabilities, difficulty handling complex inventory systems, and missing integrations. These limitations are understandable as Square extends its products upmarket to serve more sophisticated needs. For larger customers, the main concerns are overall cost and the inability to use Square's software while working with third-party payment processors. The product's pricing runs slightly higher than some key competitors.

Competition to Square's value proposition comes in various forms. The key competitors are those with modern tech stacks that can offer similar core services while targeting the SME "do it for me" segments (combining payments with broader software and financial services, merchant of record, integrated hardware, and omni-channel capabilities). The main competitors include Toast, Shopify, and Clover. Toast, focused on restaurants, offers a superior product in that vertical but is weaker in other segments. Shopify, dominant in ecommerce, excels online but lags offline. It relies more heavily on third-party applications, which can affect total cost. Customers appreciate its flexibility in choosing payment processors, unlike Square's closed system. Clover, owned by Fiserv, offers a solid product strengthened by Fiserv's distribution network. While Stripe is often mentioned as a competitor, it serves a different market by providing tools for companies to build custom solutions (the "Twilio" of payments). We consider this the "do it yourself" segment. While all these competitors are formidable, and this isn't a winner-takes-most market, all leading next-generation companies have opportunities to gain market share. Square's key differentiator is its strong consumer ecosystem, something none of these competitors possess.

Due to the management missteps discussed above, Square's market share gains have stalled, with growth slowing to match overall market rates. Though the last quarter showed an uptick, other next-generation competitors have outperformed Square during this period (see charts below). As long-term shareholders, we're maintaining our position at current valuations while giving management time to demonstrate a turnaround.

Gross Payment Volume ($b)

Gross Payment Volume Growth (YoY)

Cash App's core value proposition lies in its simple account setup, intuitive interface, and extensive peer-to-peer payment network. The platform strengthens this foundation by providing easy access to broader consumer financial services. While Cash App shares similarities with Venmo, its value proposition is distinct. Venmo primarily serves affluent users who already have established banking relationships, whereas Cash App users often treat it as their primary bank account. This positioning gives Cash App a natural advantage in expanding its financial services. Zelle, owned by a banking consortium, represents another major competitor. Despite rapid growth in peer-to-peer payments through its banks' distribution channels and free instant transfers, Zelle appeals to a demographic similar to Venmo's and lacks Cash App's comprehensive wallet and financial service offerings.

Cash App Competitor User Numbers

Emerging moats that deepen with scale

The sustainability of Block’s value proposition depends on its ability to defend its share gains over time. This starts with Square’s strong brand and word-of-mouth reputation. This can be seen in the high net promoter score versus the industry. This is reinforced by Square’s scale which enables it to offer an integrated suite of products beyond POS underpinned by being the merchant of record with a banking license, which creates an attractive “one-stop-shop” for small and medium businesses at competitive rates. Once a customer is using Square, there are some switching costs which grow with additional product usage. It is disruptive to change these systems and retrain employees. Finally, Square is able to collect a range of data that powers things like marketing, linking offline and online purchases, and credit underwriting. Square’s position in the payments stack allows it to monitor borrowers in real time.

Cash App’s advantages are underpinned by the network effects of peer-to-peer payments. This, combined with the brand, affords the business a significant customer acquisition cost advantage, especially versus incumbent banks.

As mentioned above, what gets Block across the quality line is the potential to combine both the Square and Cash App ecosystems. While a closed loop payment network to rival Visa/Mastercard would be nice, this is unrealistic. Realistic value-adding goals include rewards on the Cash App side that help consumers and drive incremental sales to Square merchants, the ability to use data across the ecosystem whether for marketing or credit assessment, or using products like Afterpay to bolster both ecosystems by giving each access to the other (e.g. Cash App consumer base able to use BNPL with better rates at Square merchants). Finally, Block can earn better economics when Cash App customers pay merchants with their stored balances (especially Square merchants) as it avoids the card rails. We see such benefits in businesses like ANT Group in China, though these have been moderated somewhat by Chinese regulation.

Attractive unit economics

Square and Cash App both enjoy solid unit economics. For Square, monetisation occurs primarily via a circa 2.75% transaction fee, of which Square keeps circa 1.1% (see below chart). The rest is paid to other players in the value chain (banks, card networks, Square’s acquiring bank).

Despite competition, the net yield has remained stable over time, while the gross yield has seen slight compression. Our base case assumes some compression in both due to competition and the shift upmarket, where larger businesses can negotiate better rates. To maintain or grow its net yield, Square must continue adding value to merchants through its various payment and software services by increasing product adoption. Despite compression, the economics remain attractive from an ROI perspective — new customer acquisition typically pays back in 7 quarters, leading to a 3x ROI over 4 years. The payback period has lengthened from 4-5 quarters to 7 quarters as Square competes more aggressively for new customers.

The main concern with Square's unit economics centers on gross profit retention (or same-store sales growth). While each annual cohort shows strong initial expansion, this growth quickly levels off to match market Gross Payment Volume ("GPV") growth. Though partly due to macroeconomic factors, this slowdown also stems from the issues discussed above, where Square's poor execution with new products has limited its ability to generate higher revenue per customer.

Square Revenue by Number of Products

In Cash App, Gross Profit per User ("GPPU") is about $76 (excluding Afterpay), while Gross Profit per Revenue Generating User ("GPPRGU") is about $117 (excluding Afterpay) — a 1.5x growth over the past three years. Our base case projects another 1.5x growth in real terms over the next five years. For comparison, traditional banks have an upper range of $800–$900 in ARPU (versus Cash App's ARPU of $107 including Afterpay), though they serve higher-income customers. This comparison illustrates Cash App's potential for expansion. To reach this potential, Cash App must expand its service offerings to increase revenue and strengthen customer engagement. Cash App demonstrates stronger customer acquisition economics than Square, achieving payback within one year and a 6x ROI over three years.

For Afterpay, the current unit economics are attractive but not sustainable over time. The merchant pays approximately 3.3% of the sale to Afterpay with 1.0% in direct transaction costs (primarily interchange fees from card-based repayments). Afterpay earns an additional 0.5% in late fees on average but loses roughly 1.0% in transaction losses and debt recovery costs. It also costs Afterpay about 0.1% in financing costs. This leaves Afterpay with a circa 1.7% Net Transaction Margin (“NTM”). The key here is the velocity of transactions. If the customer borrows and repays small amounts multiple times per year, it can lead to very attractive yields relative to funding costs (even with higher borrowing rates). As the market matures, we think the spread standard merchant discount rates will likely compress.

Long duration runway for growth

On the Square side, the key driver is continued penetration of addressable GPV, which is just shy of 3% today (circa 11% of small businesses with <$500k in revenue and 1.3% of mid-market businesses with revenues $500k-$100m). In the US, smaller sellers represent about $1.2 trillion in GPV, while the mid-market represents around $6.5 trillion.

To continue growing above market rates, Square must expand further into the mid-market segment. The company has made this a key priority, with mid-market growth rates outpacing those in the small business segment. To support this expansion, Square has grown its direct sales team to handle the more intensive sales process required for larger clients. While these larger customers come with higher acquisition costs and lower yields due to customized pricing, their payback periods and ROIs remain attractive since they generate larger transaction volumes and typically use 2.5 times more products than smaller customers. Mid-market customers now represent 41% of payment volume (up from 27% five years ago) and an even greater share of gross profit, driving expansion in both revenue and margin.

A robust ecosystem of services beyond payments is crucial for mid-market success. Our channel checks reveal that payments alone become commoditized for larger sellers, making price the decisive factor. To succeed, Square must continue innovating while overcoming its reputation as primarily an SMB-focused platform.

Our base case projects Square's annual GPV to grow from $227b today to $343b in 5 years. In the most conservative scenario, where Square merely matches market growth in the SMB segment, reaching this target would require a 13% CAGR in the mid-market segment (gaining an additional 1% market share over 5 years). Any continued growth in the SMB space would reduce this mid-market requirement. Given Square's strong value proposition, competitive position, and current mid-market momentum, these growth targets appear achievable.

There are other growth avenues like Square Loans (small circa $10k loans to merchants) but we don’t see this as a material driver relative to the above. Instead, we see such offerings as a way to improve merchant retention and encourage additional product uptake.

On the Cash App side, there are two main growth levers: expanding the user base and increasing GPPU through new financial services and products. While Cash App currently has 57m users, its growth has significantly slowed as the product matures. Our base case assumes only general population growth for users, focusing instead on GPPU expansion. We expect GPPU to increase 1.5x in real terms over the next 5 years.

How will this growth materialize? Cash App must succeed in several core product areas. With modest user growth and GPPU expansion, our base case projects gross profit to grow 1.7x from $5.2b today to ~$9b in 5 years (a $4b increase). We expect BNPL to contribute an additional ~$1b, Cash App Card over $1b, and Cash App Borrow ~$1b. The remaining $0.5-1b would come from user growth, increased instant deposit transactions per customer, or new products like Cash App Pay.

Cash App earns interchange fees on its Cash App Card transactions. We know 25m users have a Cash App Card today (representing a 44% attach rate, up from 30% in the last 3 years), who spend over $100b annually ($4100 per customer). To achieve the required gross profit contribution in our base case, the attach rate would need to continue its penetration trend to around 60% (or circa 90% of engaged users) with spend per user growing at a CAGR of 10%.

Cash App Pay works similarly but, if the customer has stored Cash App balances, Cash App settles directly with the merchant’s bank, bypassing the card networks and therefore earning higher fees, especially if the merchant is a Square merchant. There are currently 6m Cash App Pay users with a $4b run rate in volume. This is small today but could be a meaningful contributor over time (although potentially cannibalizing Cash Card transactions).

Borrow is Cash App's micro-lending product targeting 45 million U.S. adults who lack access to traditional credit. We spoke with the Former Head of Cash App Lending to understand this opportunity better. The typical loan is $90 with a 21-day term and 17x annual turnover. Cash App charges a 5% flat fee per loan, with historical loss rates under 3%, generating a 33% return on capital. While Block currently uses its own balance sheet, it could syndicate these loans like it does with Square and Afterpay. The company's strong underwriting relies on customer data and repayment behaviour, which informs weekly loan recycling decisions in near real-time. The product has achieved virtually zero customer acquisition costs due to high demand from its credit-seeking user base. Borrow customers show stronger engagement across the platform compared to non-Borrow users, generating 13% more inflows, 6% more transactions, and 10% higher variable profit (excluding Borrow-specific profits).

Block Loan Statistics

The opportunity for Borrow lies in growing adoption and increasing loan sizes. Currently, 5 million Borrow users (9% attach rate) collectively borrow $9 billion annually. After banking fees, this generates $360 million in gross profit (or $135 million in contribution after loan losses). To reach an additional $1 billion in gross profit contribution, Borrow needs to increase its attach rate to 19% (11.5 million customers), maintain its current loan frequency, and grow its average loan size by 1.6x (or achieve some combination of these metrics). While achievable, this growth faces two key challenges. First, Borrow must maintain strict credit standards without allowing loan losses to increase. Second, the economics of the 5% fee, annualized 17x, represents expensive interest. While payday lenders charge much more, and while customers accepting small loans focus more on the nominal fee amount, this rate structure becomes less attractive to customers with access to traditional credit. At 11.5 million customers, this pricing isn't problematic, but it will matter for a larger customer base. The 5% fee will likely need to decrease, though Block's new banking license will offset this by eliminating about 1% in value leakage.

The final big component is Afterpay, which given the trajectory of the business and the opportunity to leverage the distribution of Square and Cash App, we think this will be a solid contributor over time.

A risk here is Cash App’s instant deposit revenue (30% of gross profit) where Cash App charges about 1% for instant transfers between Cash App and bank accounts / cards. This is not the norm outside of the US. For example, this would be unheard of in Australia. We think this will come under pressure over time. Management’s response to our questions here have been weak, noting only that they would seek to make profit from its users in other ways to make up for any loss of instant deposit profit.

Founder driven company

We assess management across five criteria: Long-Termism, Strong Execution, Alignment, Capital Allocation, and Culture. What stands out most is that Block remains a founder-driven company, with Jack Dorsey owning 79% of Class B stock (plus a small amount of Class A stock), which equates to 41% of the voting power and 7.5% of the company. His annual compensation is just $2.75 (that's two dollars and seventy-five cents) plus modest healthcare benefits. As mentioned above, we have marked management down relative to our original underwriting. We won't repeat that discussion here.

Key Risks

The only risk in the table above not already discussed is regulation. Today, Block avoids interchange cap regulation by routing payments through various smaller banks. This practice may have to cease, as the banking-related assets climb above the $10b threshold. The primary impact would be on Cash App Card fee revenue.

Valuation

As a payments business, Block has various pass-through transaction costs, so management uses gross profit as a pseudo-revenue metric. Our base case projects gross profit to compound at 11% over the next 5 years (9% for Square and 12% for Cash App). We assume Square's GPV will grow at an ~8.5% CAGR—5% in the SMB space and 13% in the mid-market. This growth will be partially offset by compression in Square's gross and net yields due to competition and mid-market customers demanding lower rates. Square's net revenue (net of transaction costs) has a CAGR of 7.5%. Our views on Cash App's gross profit growth potential are discussed above, so we won't repeat them here.

With economies of scale in both Square's and Cash App's fixed cost bases, along with variable expense reductions (in % terms) as growth slows, we believe operating margin (as a percentage of gross profit) could reasonably expand by high single digits. The implied adjusted free cash flow margin also expands, though to a lesser extent (low-to-mid single digits) due to the cash flow dynamics of each business and the increasing burden of growing the loan businesses (we assume Cash App Borrow loans remain on Block's balance sheet). Notably, as Block achieves greater lending success, margin expansion decreases in percentage terms while remaining accretive to dollar growth — effectively, the business becomes more bank-like.

Block currently trades on an 8% NTM adjusted free cash flow yield[1] and a 19x NTM GAAP P/E ratio. Based on our view of quality at exit, our base case assumes a 6.5% NTM adjusted free cash flow yield (15x NTM P/E ratio). In all, this gives us a base case IRR of circa 20% (0% downside, 29% upside).

Block Footnotes

[1] As a payments business, certain cash flows included in Cash Flows for Operations can’t be used by Block for its business and therefore need to be reversed out of the standard FCF calculation. The FCF yield is also net of excess cash on the balance sheet.

Business Update

A big shout out to our work experience intern who has been working with us for the last couple of months. He has done some great work on Agentforce, the expansion upstream of Meta in the advertising value chain, big tech capex and more. He’s just secured a fantastic internship implementing AI / machine learning at a quant hedge fund in NYC. Thank you!