Under the Spotlight: Square
5 years since debuting on the NYSE, Square has proven the importance of thinking outside the box, if you pardon the pun. With an extraordinary 1670% gain since 2015, the $SQ that sits in so many Stake portfolios has more to it than you may expect. Today we will look at what the payment processor has become to step it up for the future.
It’s hip to be Square.
Unless you are an investor, chances are your familiarity with Square stems from 2 sources.
Firstly, Square was founded by super-CEO Jack Dorsey. The outspoken entrepreneur founded Twitter in 2006. 4 years later, with all that free time he must have had, he started Square. Dorsey is in the rare position of being CEO of 2 listed multi-billion companies.
Secondly, we’ve all seen the cute little white boxes across cafés in Ponsonby, op-shops in Marrickville and rooftop bars in Shoreditch. Square’s products allow for anyone to accept payments without the need for an outdated, clunky POS terminal (I swear that stands for Point of Sales 😉).
With that, let’s go Four Corners on this company and see what they’re about.
Silicon Valley loves a story. Founders can’t simply come up with a good idea; billion-dollar unicorns are borne out of struggle and personal serendipity.
In the 2000s, Jim McKelvey was a glass blower in St. Louis. As he started to lose thousands in sales because there was no way to accept AMEX from his studio, he reached out to friend Jack Dorsey and Square was created.
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How does Square make money?
By taking a clip of yours. Every tap or swipe on a reader involves a 2.6% merchant fee and 10c. That’s a pretty significant figure. In 2019, over US$3b in revenue was generated through transaction fees. On top of that, like any 21st century tech business they offer a subscription software for merchants. This started as Square’s core business but who knows how much longer this will be the case.
Even in today’s markets where a 10000x* PE ratio can be rationalised with figures like community adjusted EBITDA, tap and go terminals weren’t enough to turn $SQ into a US$100b company alone.
*For the record, Square trades at a TTM P/E of ~350.
Then came Cash App in 2013. We’ve all seen the incredible products neobanks are producing in our respective nations; the US neobank space is a little stale. It may be because Cash App is so dominant. With 36 million MAU and over 100 million downloads, Cash App allows users to spend, save, and invest from their phones.
While it is an ancillary service to customer’s traditional banks, holding a fraction of 36 million people’s bank balances leads to a huge amount of interest revenue but that’s only a part of the US$1.2b the app rakes in every year. Combined with subscription-only features like instant transfers, 7 years into operation, generated US$377m in profit in Q4, up 162% yoy. Cash App is quickly becoming Square’s dominant profit engine. Profit from payment processing totals US$427m as growth steadied to 13% yoy.
$BTC on the books
Those Cash App growth figures are impressive but there’s a segment of the business expanding at an astronomical rate, or so the figures say.
It’s no real surprise that a guy like Dorsey is big on Bitcoin. In the last few months he stood by his view that Bitcoin was the world’s leading crypto currency and that blockchain and crypto had an important role to play in our future. It’s more than just lip service.
Square has built their products around this ethos. Cash App allows customers to buy and hold Bitcoin. While crypto revenue is up 1000% yoy based on their latest earnings, and makes up for almost half of Square’s revenue, the numbers are a little deceiving.
You see, if a trader buys $500 worth of $BTC, that whole $500 is counted as revenue on Square’s books. After all, despite US$1.76b of Q4 Bitcoin revenue, profit stood at US$41m (0.2%).
Pointing towards what other forms of innovation we may expect, Square won a patent last year to establish a fiat to crypto payment network. Pay in dollars and the merchant receives Bitcoin or other cryptocurrencies. If Square is taking almost 3% on regular transactions, you can imagine the juice on fiat to crypto.
Bitcoin revenue is the total sale amount of Bitcoin to customers.
Seat at the table
Consider this, with their card readers and Cash App, Square has an insight into the spending habits of millions of Americans: What they spend money on, how much, when they get paid, how they spend depending on when they got paid; that’s a powerful set of numbers. And while I am sure retailers would love access to that data to run the most efficient targeted advertising campaigns known to man, the data could also be used for a broader good.
Jim McKelvey, co-founder of Square, has been elected to the board of the St Louis Fed in an effort to advise economists on the real ways money is flowing through the economy. Who better to ask? With a current role on Square’s Board of Directors, McKelvey saw firsthand the impacts of the virus on spending habits and small business revenue. Such information goes a long way towards future policy.
While this may not be a piece of information that overly affects the stock prices, it’s fascinating to know.