An Investment Thesis on Structural Advantages, Artificial Intelligence and Operating Leverage
Research date: 4 November 2026
Investment horizon: 5–10 years
Investment approach: Long-term fundamental conviction with opportunistic entry and exit points
1. Introduction: Finding Value Where Others See Risk
I first discovered Block, formerly Square, while researching Jack Dorsey, the co-founder and former CEO of Twitter. Dorsey had already demonstrated an ability to build a globally influential technology company, and I was interested in understanding what else he was working on.
That research led me to Square, a business whose share price had fallen considerably despite what I believed were increasingly attractive structural advantages.
My investment philosophy is relatively straightforward. I look for companies with strong leadership, durable competitive advantages and exposure to long-term economic trends. Ideally, these companies have fallen out of favour with investors, creating an opportunity to acquire shares at attractive valuations.
I consider myself an opportunistic investor. I develop a long-term thesis to understand a company’s underlying value, but I am prepared to buy and sell as market sentiment changes. The long-term thesis helps me assess risk, while periods of market irrationality provide opportunities to act.
Block is an interesting example of this approach.
The company operates at the intersection of several significant trends: digital payments, financial technology, artificial intelligence, Bitcoin infrastructure and the changing economics of modern businesses.
I believe the market may be underestimating how valuable Block’s existing infrastructure could become as these trends converge.
Importantly, Block does not need to invent an entirely new business model to benefit. Much of the necessary infrastructure and customer relationships already exists.
2. Understanding Block’s Financial Performance
Block operates two principal ecosystems: Square, which serves businesses, and Cash App, which serves consumers. Its broader portfolio includes Afterpay, financial services and Bitcoin-related initiatives such as Proto.
The financial results provide an encouraging starting point.
In its third-quarter 2026 results, released on 3 November, Block reported gross profit of approximately $3.24 billion, representing 22% year-over-year growth.
More importantly, adjusted operating income increased 92%, demonstrating the potential for operating leverage as the business scales. SEC
Table 1: Block’s Latest Quarterly Performance
| Financial metric | Q3 2025 | Q3 2026 | Growth |
|---|---|---|---|
| Revenue | $6.12B | $6.72B | 9.9% |
| Gross profit | $2.66B | $3.24B | 21.5% |
| Cash App gross profit | $1.62B | $2.07B | 27.5% |
| Square gross profit | $1.02B | $1.16B | 13.7% |
| Adjusted operating income | $480M | $923M | 92.3% |
| GAAP operating income | $409M | $428M | 4.6% |
| Adjusted diluted EPS | $0.54 | $1.13 | 109.3% |
Source: Block Q3 2026 shareholder letter. Growth calculated from reported figures; adjusted measures are non-GAAP. SEC
The distinction between revenue and gross profit is particularly important.
Bitcoin transactions generate substantial reported revenue but relatively little gross profit. Consequently, gross profit provides a more meaningful measure of Block’s underlying economic growth.
Chart 1: Block’s Gross Profit Growth
Block quarterly gross profit
Reported gross profit, Q3 2025–Q3 2026, USD billions.
| Quarter | Gross Profit |
|---|---|
| Q3 2025 | 2.662 |
| Q4 2025 | 2.872 |
| Q1 2026 | 2.909 |
| Q2 2026 | 3.166 |
| Q3 2026 | 3.235 |
Source: Block Q3 2026 shareholder letter, SEC filing.
Block’s management now expects approximately $12.63 billion in gross profit for 2026, representing 22% annual growth.
Its preliminary 2027 outlook calls for $14.52 billion, implying another 15% increase. SEC
These figures suggest that Block’s underlying business continues to expand despite the volatility associated with its share price.
3. Square: The Strategic Importance of the Point of Sale
One of Block’s greatest structural advantages is Square’s position at the point of sale.
Square provides payment terminals, software and financial services to businesses ranging from independent coffee shops to larger retail and restaurant chains.
I believe there is an important economic advantage to controlling the interface where businesses interact with their customers.
The point of sale is not simply where a payment occurs. It is where valuable information about commerce is generated.
Square can use this position to offer inventory management, employee scheduling, customer analytics, loyalty programmes, banking services and financing.
As merchants adopt more products, Square can become increasingly integrated into their daily operations.
I also believe local communities and neighbourhood commerce will remain important parts of the economy. Coffee shops, restaurants and independent retailers provide experiences and relationships that cannot be entirely replicated online.
Square is positioned to participate in this economic activity.
Block’s recently introduced Neighborhoods initiative is particularly interesting because it connects Cash App consumers with participating Square merchants.
In September 2026, Cash App reached approximately 60 million monthly transacting users, while Square’s gross payment volume growth accelerated to 14% in the third quarter. BigGo Finance
The opportunity is to connect these two ecosystems, increasing customer engagement while reducing friction between consumers and merchants.
The company that controls the commercial interface has an opportunity to capture value far beyond the original transaction.
4. Cash App: Building a Financial Ecosystem for the Next Generation
Cash App provides another significant competitive advantage.
Its consumer ecosystem includes payments, savings, investing, borrowing and debit-card functionality.
Cash App has developed a substantial presence among younger American consumers, providing Block with relationships that could become more valuable as those customers accumulate wealth and require additional financial services.
The economics are already meaningful.
Cash App generated approximately $2.07 billion in gross profit during Q3 2026, representing 27% annual growth.
Its expanding financial services business provides opportunities to increase gross profit per customer without relying exclusively on acquiring new users. SEC
I believe Cash App could evolve into something resembling a personal financial operating system.
Rather than maintaining separate relationships with numerous financial institutions, consumers could increasingly manage payments, borrowing, saving and investing through a single interface.
Square Financial Services and Block’s broader lending infrastructure reinforce this opportunity.
However, expanding lending also introduces credit risk. Block’s provisions for transaction, loan and consumer receivable losses increased significantly in Q3 2026, demonstrating that financial services growth must be evaluated alongside underwriting performance. WKZO
5. Artificial Intelligence: A New Intelligence Layer
Artificial intelligence is perhaps the most compelling aspect of my investment thesis.
I believe AI will fundamentally change how consumers and businesses interact with financial services.
For Square merchants, AI could transform existing transaction information into personalized operational intelligence.
A restaurant owner could receive recommendations concerning gross margins, staffing requirements, inventory purchasing, cash flow and financing.
Instead of navigating multiple software applications, the owner could ask Square how to improve profitability.
Similarly, Cash App could provide personalized financial insights to individual consumers.
AI could help users understand spending patterns, establish savings objectives, identify financial risks and make better-informed decisions.
Block has already begun developing these capabilities.
Its second-quarter 2026 shareholder letter reported that Moneybot had more than one million weekly engaged accounts, while Managerbot was helping merchants automate marketing, margin analysis and operational tasks.
Management also described a shared internal AI platform supporting multiple products. SEC
This is strategically important.
Block does not necessarily need to develop the world’s most advanced AI models. It needs to integrate increasingly capable models into products that already possess customer relationships, financial infrastructure and relevant transaction data.
I believe the competitive advantage lies in the combination of AI, distribution and proprietary operational context.
6. Operating Leverage: Building a Lighter Enterprise
Artificial intelligence will not simply create new markets. I believe it will also allow companies to operate with considerably lighter organizational structures.
Historically, expanding a business required increasing expenditure on employees, administration, software development and customer support.
AI could fundamentally change this relationship.
Once the core infrastructure of a technology company has been established, additional customers and services may be supported without proportionately increasing operating expenses.
This phenomenon is known as operating leverage.
Consider a company generating $10 billion in gross profit with $9 billion in operating expenses.
It earns $1 billion in operating profit.
If gross profit increases 20% while operating expenses remain unchanged, operating profit rises to $3 billion.
A relatively modest increase in gross profit produces a substantial increase in profitability.
Chart 2: Block’s Emerging Operating Leverage
Adjusted operating income is growing faster than gross profit
Indexed to Q3 2025 = 100. Q3 2026 values reflect reported year-over-year growth.
■ Gross profit index
■ Adjusted operating income index
| Period | Gross Profit | Operating Income |
|---|---|---|
| Q3 2025 | 100 | 100 |
| Q3 2026 | 121.5 | 192.3 |
Source: Block Q3 2026 shareholder letter. Indexed calculations.
Block is already demonstrating elements of this transformation.
In February 2026, management announced a substantial workforce restructuring, reducing headcount from more than 10,000 employees to fewer than 6,000.
Dorsey explicitly connected the decision to the changing capabilities of AI and the opportunity to operate with smaller teams. SEC
While the long-term financial benefits remain uncertain, the strategic direction is clear.
I believe Block could become a considerably more efficient enterprise, capable of growing gross profit faster than its underlying cost structure.
It is important, however, to distinguish adjusted profitability from GAAP results. Third-quarter GAAP operating income increased only 5%, partly reflecting substantial restructuring and other charges.
The full benefits of this transition therefore remain to be demonstrated.
7. Proto: Bitcoin Infrastructure and Data Centres
Block’s Bitcoin initiatives provide exposure to another potentially important growth market.
Proto develops specialized Bitcoin mining hardware, including application-specific integrated circuits, modular mining systems and supporting software.
Its modular architecture allows operators to replace computing components without necessarily replacing entire mining machines.
This could reduce upgrade costs and improve the economics of large-scale Bitcoin mining.
I am particularly interested in how this technology could integrate into data-centre infrastructure.
Bitcoin mining and AI computing both require substantial electrical capacity, cooling and specialized facilities.
Although Bitcoin ASICs cannot perform general-purpose AI computing, mining operations could potentially coexist with AI infrastructure in certain facilities.
Bitcoin mining also offers flexible electricity demand because mining equipment can be temporarily switched off when power becomes more valuable elsewhere.
Proto could therefore benefit from the development of facilities combining different computational workloads.
The company has already established a significant commercial relationship with Core Scientific, involving approximately 15 exahashes per second of mining capacity.
Nevertheless, Proto remains an emerging business, and its contribution should not be confused with Block’s established financial services earnings.
Block reported only $52 million of gross profit across its entire Bitcoin ecosystem in Q3 2026, down 50% year over year. Proto’s standalone contribution was not separately disclosed. SEC
For now, I consider Proto a potentially valuable long-term opportunity rather than a central justification for Block’s current valuation.
8. Valuation: Understanding the Opportunity
The fundamental question is whether Block’s future profitability is adequately reflected in its market valuation.
Management’s 2026 guidance provides a useful starting point.
Table 2: Financial Outlook
| Metric | 2025 actual | 2026 guidance | 2027 outlook |
|---|---|---|---|
| Gross profit | $10.4B | $12.63B | $14.52B |
| Gross profit growth | 17% | 22% | 15% |
| Adjusted operating income | $2.1B | $3.52B | — |
| Adjusted operating margin | ~20% | ~28% | — |
Sources: Block’s 2025 annual report and Q3 2026 shareholder letter. Figures rounded. Filings Tools
I would evaluate Block using forward earnings, free cash flow and enterprise value relative to gross profit, rather than relying exclusively on reported revenue multiples.
The investment opportunity depends on three developments: sustained gross profit growth, successful integration of AI into existing products and meaningful improvements in operating efficiency.
If these occur simultaneously, earnings could compound considerably faster than revenue.
However, valuation discipline remains essential. A compelling business does not automatically represent an attractive investment at every share price.
9. Risks and Investment Considerations
Several factors could undermine my thesis.
Competition from financial technology companies, banks and payment platforms could constrain Square’s and Cash App’s growth.
Expanding lending operations creates exposure to credit losses, while regulatory requirements introduce additional costs.
AI-driven efficiency improvements may also take longer to materialize than management anticipates.
Finally, Proto faces established competitors in Bitcoin mining hardware, and the economics of mining remain sensitive to Bitcoin prices, electricity costs and network difficulty.
I would therefore monitor gross profit growth, customer engagement, credit performance, GAAP profitability and free cash flow to determine whether the underlying investment thesis remains intact.
10. Conclusion: Structural Advantages in a Changing World
I believe Block has a long and potentially prosperous future.
The company occupies an interesting position at the intersection of digital commerce, consumer financial services, artificial intelligence and Bitcoin infrastructure.
Square provides access to the commercial point of transaction. Cash App provides direct relationships with millions of consumers. AI could make both platforms more valuable while simultaneously allowing Block to operate with a lighter and more efficient organizational structure.
Proto introduces an additional opportunity in the infrastructure supporting Bitcoin.
What interests me most is that these advantages already exist within an established business generating substantial gross profit.
I am not relying exclusively on the emergence of new markets. I am investing in the possibility that existing infrastructure becomes considerably more valuable as the world changes around it.
My approach remains opportunistic. I intend to evaluate Block’s shares relative to my assessment of the company’s long-term value, taking advantage of periods when market sentiment creates attractive opportunities.
Ultimately, I believe Block represents the type of investment I continually search for: an established business with strong leadership, improving structural advantages and the potential to benefit disproportionately from technological change.
Author’s disclosure: I hold shares in Block, Inc. My investment positions and trading history are available on the front page of my website.
Research Sources
The primary financial sources used in this article are Block’s regulatory filings and shareholder letters:
- Block Q3 2026 Shareholder Letter — Latest quarterly financial results, segment performance and management guidance.
- Block Q2 2026 Shareholder Letter — AI initiatives, product development and operating performance.
- Block Q4 2025 Shareholder Letter — Organizational restructuring and management’s AI strategy.
- Block 2025 Annual Report — Historical financial performance and business fundamentals.
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