This year, we continue to modify our portfolio to reflect the current market realities. One of those moves include parting ways with one of our favorite companies, Block Inc.
Our thesis on Block (NYSE: SQ) was built around their consumer finance efforts and their emphasis on expanding consumer opportunities in crypto/blockchain technology. However, this was hurt by the meltdown in the crypto market, but we decided to stick with Block for other reasons. The first is that they are still growing strongly, with revenues of $4.5B in November last year, and growing 17% yearly. When you exclude their crypto trade business, their regular operating businesses (Cashapp, Seller ecosystems) grew an even more impressive 36%. The years before 2022, revenue was growing at even faster rates.
So why sell now?
Much of Block’s revenue growth has not translated into profits and free cash-flow for the company. While we understand some growth in marketing and customer acquisition costs, the consistent growth in general, administrative, and personnel expenses bothered us. Block’s operating costs have grown at an average of 60.4% in recent quarters, much faster than revenues and multiples higher than profitability. Runaway costs have generally been a feature of Jack Dorsey-led companies, and after watching this number for a while, we lost confidence in the ability or willingness of the company to rein in these costs.
This is a big negative signal to us, given the era of higher interest rates, lower liquidity, tough economic conditions, and a potential recession. With the drop in stock prices, we believe there are more compelling and better-positioned companies to invest in for a better risk-adjusted return.
We believe Block is an incredible company with a compelling product and opportunity ahead of it, and will remain on our watch list till its thesis makes sense for our portfolio.