Block, Inc. XYZ Moat

Key data

The moat

Two businesses with two different advantages, and they are not equally strong.

Square is the primary one. A coffee shop that takes payments on a Square terminal also runs its payroll, its inventory, its loyalty programme and often a working capital loan through the same login. Leaving means re-entering a menu, retraining staff and reconnecting the accountant, which is a fortnight of work to save a few basis points. That is a switching cost, and it is why Square can hold price on a service that is otherwise a commodity.

Cash App is the secondary and it is the larger profit pool at $1.97B of quarterly gross profit against Square's $1.16B. Its advantage is a consumer network: sending money to someone requires them to be on it too. That is a real effect and a weaker one, because most people have Venmo and Zelle on the same phone and switching costs nothing.

What the primary moat produces is pricing. Square's monetisation rate fell to 1.18% and then recovered, which a business without pricing power cannot do.

Widening or narrowing

The two engines diverge cleanly.

*Blank cells are periods the company did not disclose on this basis.*

Square's volume growth nearly doubled and its price bottomed in December and turned back up. That is the shape of a switching-cost moat working: volume rising while the rate holds.

Cash App tells the opposite story with better headline numbers. Gross profit grew 31%, and the user base has not moved in three quarters. Every dollar of that growth is monetisation of a fixed base, which has a ceiling nobody can see until it is reached.

The overrated case. Cash App's gross profit growth is the number most cited and it is the weaker evidence. A network effect that stops adding members is not compounding, it is being harvested, and the growth rate already decelerated from 38% to 31% in the most recent quarter. Meanwhile the moat with actual switching costs is the smaller half by profit.

On profit pool, Block sits at the merchant and consumer ends and keeps a thin slice of each, with the card networks taking their cut in between on most transactions. The bitcoin business is the extreme case: 35% of revenue and 4% of gross profit, a business that moves enormous value and keeps almost none of it.

The primary moat is widening. The secondary one is not.