Where Are We Now
Updated on: 11/8/2021
Square is redefining the way transactions and banking looks for businesses and individuals through the Square Seller Ecosystem and the Cash App. Square is all about financial accessibility. Although we would not rush to buy shares today at this valuation, we think the company will do very well over time by democratizing personal and small business finance.
Square’s pursuit to make financial management easier for everyone is paying off – gross profit is up over 40% as gross payment volume processed on Square’s platforms soars above $45 billion.
Square does not fear innovation, it drives it. Bitcoin demand was met by placing Bitcoin trading capabilities onto the Cash App, and Square recently announced it is buying Afterpay – a global buy now, pay later company – to provide more payment and financing options to consumers.
Square’s two fintech products Square and CashApp have become important tools to facilitate commerce and payments.
Square’s vertical product line ensures any seller has access to fast transactions and other financial services, from the small local businesses up to mid-market companies. The Square Terminals allow sellers to easily accept cashless payments. From there, Square has branched out into other fintech products and services to help merchants succeed.
Square introduced the CashApp to facilitate Person-to-Person (P2P) transactions which is in direct competition with Paypal’s Venmo offering. CashApp has gained significant market share and seen explosive growth across the segment.
Square presents significant optionality across fintech and payments and will benefit from secular tailwinds moving to a cashless society.
Square Inc’s strength comes from their two main products, Square and CashApp. Both products have grown tremendously over the years.
Square focuses on sellers and providing them with the accessibility of sales payments through their Square Terminals. These terminals use NFC and Tap-and-Go readers, emphasizing the idea of a fast point of sale, while ensuring the safety of the customer’s privacy. Their extensive product line ensures that all businesses have access to all their products at a wide range of prices.
Square’s Revenue Breakdown:
Transactions/Processing Fees from Terminals
CashApp, Square Inc’s second product, focuses on individuals to provide ease of mind with day-to-day finances. The app allows you to send, pay, get paid, and invest your money. Their wide variety of functions make CashApp a central app to manage your money.
CashApp’s Revenue Breakdown:
Subscriptions and Services
Square Revenue by Segment (Q3 2021)
Source: Square Investor Relations
CashApp Revenue by Segment (Q3 2021)
Source: Square Investor Relations
Jim McKelvey, a friend of Twitter founder Jack Dorsey, was unable to sell a $2000 glass faucet because he could not accept credit cards. This sparked an interest in both McKelvey and Dorsey to create the now know reader, Square Terminal.
As the years went on, the company started to introduce more products to help the business grow.
2013: Square Stand – an iPad turned into a point-of-sale system
2013: CashApp (formerly known as Square Cash) – Person2Person money transfer via app or online
2014: Square Online – a system to allow businesses to allow customers to book appointments
2015: Square Payroll – a tool to help employers organize payroll for employees
2018: CashApp allows users to buy and sell Bitcoin
Being in the industry for nearly a decade now, Square Inc. has grown tremendously, all because of a glass faucet. Jack Dorsey along with Jim McKelvey took the idea of seamless transactions to the next level, expanding to businesses all over the world.
One Tap into the Future
Square Inc’s first product comes from Square, an NFC based payment terminal to help businesses with simple point of sales transactions. Their vertical product line ensures any seller has access to fast transactions, from the small local businesses up to the mid-market companies.
The secret to their rapidly growing market dominance?
– the Seller Ecosystem.
This ecosystem ensures Square Inc. can provide for all of a business’s needs, whether it be software or hardware related.
The ecosystem includes products such as the Square Terminal and Reader, to Square Online, an online software intended to help sort out payroll, invoices and upcoming client appointments. They recently added a new product called Square Messaging, to allow sellers to get into contact with their customers easier through message services, instead of phone calls.
As Square Inc. continues to add more and more services to its seller’s ecosystem, the Square product line will continually be able to support all kinds of businesses, regardless of their size and needs.
The Rise of CashApp
As Square Inc. is all things e-commerce and business, they also wanted to expand into a well-known market: Person-2-Person payments. To diversify their revenue streams, Square Inc. introduced CashApp, an app to send money to friends and family.
At first, the company’s growth was slow because of market leaders such as PayPal being the front runner of P2P payments, but that soon changed when CashApp started promoting the app through Super Cash App Fridays. This initiative brought in an influx of users, counting to nearly 22 million users. On top of that, in 2018, CashApp introduced the ability to trade bitcoin, which helped to bring in more users.
Square Revenue (Q3 2021)
Once the pandemic hit, CashApp interactions flew through the roof. The app introduced new features such faster direct deposits and an embedded trading platform, all things important and popular today.
The price of Bitcoin also spiked during the year, allowing the company to profit off every cryptocurrency transaction made. These factors drastically increased the company’s overall revenue. More importantly, it's helping draw users to the app for all its other consumer benefits.
However, we must caution that the Bitcoin revenues are mostly eaten up by its directly attributable cost of sales for a gross margin of around 2%. Although the revenues look beastly, the bottom line hardly benefits. In fact, as Bitcoin revenues grow, the company's overall operating and net margins will appear to shrink as Square's other businesses have much higher margins on a combined basis.
Therefore, we recommend investors look at Square's financials without the effects of Bitcoin. Sales growth is an important key to a company's growth, but not when it operates at such tight margins.
Square Gross Profit (Q3 2021)
Addressing New Opportunities
Square Inc. has entered two large markets with opportunities for proven growth, being marketplaces and P2P (Person-2-Person) services. Both markets have massive opportunities being worth $85 billion and $60 billion respectively, in the U.S. alone. These markets have already given the company the ability to have scalable market channels with proven growth in the last 5 years. These figures are only considering the fact the company has penetrated 3% of each market. As the company continues to grow, profits will scale accordingly.
The company plans to set up a recurring investment structure to put profits back into Square for continual growth. Square Inc.’s previous success with an increase in cash flow over the years allows for the company to expand the Square product line.
In terms of CashApp, Square Inc. is focusing on new developments and improvements to their app. Their recent addition to allow users to trade cryptocurrencies was a strong move, as it added a ton of revenue, albeit at micro margins. The more important opportunity is meeting client demand for trading Bitcoin and hosting a super-app in which consumers can do nearly everything. They plan on continuing to add more functionalities to their app along with an expansion into new markets, to ensure scalability and strong return on investment.
The Bitcoin Exposure
Investors should be aware of the $220 million investment in Bitcoin. This acquisition gives users the ability to trade cryptocurrencies through CashApp.
In the short run, yes, it is driving a lot of the revenue growth, but the future is unpredictable. It is uncertain if this bitcoin volume will continue in the following years.
If the price of Bitcoin falls over a long period of time, users may leave the CashApp if that's all they used it for.
Square Inc. also faces balance sheet risk if the asset declines in value, which could hurt the company's valuation to a large degree.
Square Inc. strives to make business accessible for everyone, to make things fair and square.
Being in the market for nearly a decade now, the company is settling in to be a household name in both the sellers’ marketplace and P2P (Person-2-Person) services.
As Square Inc. adds more and more products into their seller’s ecosystem, along with their successful business model in CashApp, they will continue to be successful in both markets.
The company’s diversified revenue streams, along with the plethora of services that each product has to offer, ensures that Square Inc. will have sustained growth into the future and is here to stay.
Investors should be aware of Square Inc.’s heavy exposure to Bitcoin on their balance sheet in addition to cryptocurrency trading volumes potentially affecting their user base.
Investors should watch the segments unrelated to Bitcoin revenues for true growth as Bitcoin is an incredibly low-margin business for Square Inc.