David Rosenthal: evaluation

Transcript context

…Let’s talk about why they’ve killed it. So Square, as we both argued in different ways, I think that they were sort of the creator of this new category of cloud POS and they are the most well-recognized name in it and they’re doing extremely well in this massive rising tide. So they’ll continue to kind of grow with that industry and your point of view that, yeah, and indeed they also were bundling all these other amazing services to make these businesses perform better and make all the card fees on those but also increase the number of transactions that they take a piece of. So great, the company is doing well. The other magic to this whole thing is this is the sort of business that also has zero churn because for Square, on a per cohort basis, so for folks that aren’t familiar, a cohort is like a whole bunch of people who are becoming new customers in the same time frame. So they would all come in and their net churn was zero. So basically what that meant is the way that this business works is they would lose customers, they would churn out at a certain rate but the amount of money that the customers from that cohort who stayed there would generate from growing their business was approximately equal to the business that Square was losing from these customers that churned out of the cohort. So actually if you look at every new cohort they add, they flatten out over time and make a consistent amount of revenue for the company basically indefinitely. And so it makes a lot of sense for once Square has this cocktail TV ratio where they can figure out, “boy, when we deploy X in marketing spend, we make it back, plus 30 percent or so in less than 2 years, and we’re able to just keep pouring money on to do our marketing efforts and we just keep getting basically zero net churn cohorts that all stack on top of each other forever.” So, very predictable business in an industry that's absolutely a rising tide. It’s something where if you look at it on its fundamentals rather than as like a speculative “who knows if this will actually pan out” thing, it seems like it’s a great growth company. We basically talked about the content of the narrative section here but it’s like a tale of two stories, a tale of two companies here. It was the best of times, it was the worst of times. If you listened to the press around the time of the Square IPO, and I remember lots of investors sort of talking too and chattering them, it was like this is the worst of times, like this is the death knell for all these unicorn companies and Square is like prime example of super overvalued and it turns out that their actual business which is payments is a super crappy business, really low margin, if any margin. And example #1 of that is look at this Starbucks deal, like it sucks. Square is losing so much money on it and that means they’ll never be able to serve large margins. So this company is doomed, right? Like that was the narrative that was so dominating the press cycle and the investor cycle but I think the lesson here is like in any kind of situation like that, you really got to dig into the company’s fundamentals whether the narrative is like this company can do no wrong or whether this company is doomed. And Square’s narrative through the whole thing, you read the IPO or you read the S1, they actually say in the S1 like “we serve small business merchants. We make commerce easy. We make it accessible to everyone, like we’re not a payments company. We’re about helping merchants increase their business.” And because of these flywheel effects, that is good for us too. Yup. And boy, it's funny. Not to talk about Rich Barton in every episode now but when you hear him talk and he talks about the name Expedia and the name Zillow, like picking an empty vessel and then you get to fill it with your marketing and you get to fill it with your product and your brand that the value prop to customers, like Square was not a payment word. It’s something that they can choose to fill with whatever they want to be. In the way that Snap is a camera company and we all said, “Oh, Snap is a camera company.” Like, Square is a payments company. Square is a small business company and I think that’s got a lot of power to it.…

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