This research comes from my investment blog (http://tedinvests.com/posts/). My Blog is formated a bit differently as it provides more graphs/charts and videos. Hope you enjoy the read!
Note - I wrote this post when the stock was trading at $200.01
Square is a commerce ecosystem that enables its customers to start, run, and grow their businesses. Through the combination of hardware and software, Square enables sellers to turn mobile devices and computing devices into payments and point-of-sales solutions. When a seller downloads the Square Point of Sale mobile app, they can begin to take their first payments in person via a magnetic strip (aka a swipe), Near Field Communication (NFC) (aka a tap), or online payment methods. Square additionally allows sellers to gain access to a variety of technologies and features such as reporting and analytics, next-day settlements, digital receipts, payment dispute management and chargeback protection, and Payment Card Industry (PCI) Compliance. From the consumers (buyers) perspective, Square Cash offers individuals access to a way to send and receive money. Chances are you’ve seen this company;s products when stopping by various small businesses. They charge merchants 2.6% of the sales price plus 10 cents for any transaction that is not manually keyed-in. For any transactions that are keyed-in, they charge 3.5% plus 15 cents.
In addition to their payment and point-of-sale services and products, Square also owns Cash App. Cash App is a peer-to-peer (P2P) payment service. Square launched Cash App in 2013 to compete with services like Venmo, Apple Pay, and Google Play. This service, along with their competitors, allow consumers to use their smartphones to pay for goods and services, pay bills, and transfer money to friends and family. Also, Cash App gives users the ability to buy bitcoin and stocks. Cash App makes money by charging businesses to use their application and by charging their individual users transaction fees to access additional services.
When trying to find the transaction fees that Cash App charges for bitcoin, I simply couldn’t find any. All I could find on the Cash App bitcoin fees page was a message that stated, “Cash App charges two kinds of fees for bitcoin transactions: a service fee for each transaction and, depending on market activity, an additional fee determined by price volatility across U.S. exchanges.” Taking a deeper dive I was able to find an article from CoinDesk that mentioned Cash App’s fees for Bitcoin and there it stated, “One screenshot of a purchase page dated Nov. 5 showed a $0.10 fee for a $10 purchase (1 percent). We also saw $0.88 for a $50 purchase (1.76 percent) and $1.75 for a $100 purchase (1.75 percent). It seems that Square rounds down in certain instances.”
Total Addressable Market (TAM)
When looking at Square’s September 2020 Investor Presentation, they segmented their total addressable market (TAM) in a number of ways. The seller ecosystem in the U.S represents a $85+ billion opportunity with $39 billion coming from transaction profits, $30 billion from software, $12 billion in square capital, and $5 billion in financial services. The Cash App ecosystem has an even larger opportunity with $9 trillion in addressable volume in the U.S with $4 trillion coming from sending, $2 trillion from spending, and $3 trillion from investing. Also, within the U.S the Cash App ecosystem represents a $60+ billion opportunity with $20 billion coming from sending, $41 billion from spending, and $2 billion from investing. What’s especially great about the opportunity with Cash App is that not only is it a well-known brand, but it’s technology is scalable, provides Square with recurring revenues, and provides a strong return on investment. Square is currently available in over 14,000 retail stores and works with a number of e-commerce and third-party apps such as Wix, Postmates, The RealReal, and more. In terms of Cash App, they have more than 7 million Cash Cards which on average transact multiple times a week.
First Quarter 2021 Financial Results
Note: GPV measures the total amount (in $) of card payments processed by merchants that use Square’s system.
The following items affected net income (loss) per share during the respective periods:
Important points to address
Square, Inc. Announces Plans to Acquire Majority Ownership Stake in Tidal (March 4, 2021) – Perhaps one of the last things you would expect coming from a payment processing company is entering into a definitive agreement to acquire a majority stake in a global music and entertainment platform. Yes you heard right, Square announced that they entered into an agreement to acquire a majority stake in Tidal and pay for it using a mixture of cash and stock of $297 million. Under this agreement the existing artist shareholders will be the remaining stakeholders. Tidal will be operating independently within Square, alongside their current ecosystem of products and services. Square sees this opportunity as a way to help musicians find new ways to support their work and make better decisions. Jack Dorsey (CEO) said, “It comes down to one simple idea: finding new ways for artists to support their work, New ideas are found at intersections, and we believe there’s a compelling one between music and the economy. I knew TIDAL was something special as soon as I experienced it, and it will continue to be the best home for music, musicians, and culture.” Jay-Z is the co-owner of Tidal and once this deal closes he is expected to join Square’s Board of Directors. While I believe that Apple Music and Spotify will remain the dominant music streaming platforms for years to come, I’m interested in how Square and Tidal will leverage one another’s businesses to generate value. I don’t believe this news will change Square’s business materially, but I look forward to seeiing what comes from this deal.
Square introduces Square for Retail: A full POS system to help retailers run their business (January 19, 2021) – Square recently announced a new point-of-sale (POS) system that simplifies two problems for businesses: selling anywhere and managing inventory. The point-of-sale or point of purchase is the time and place where a retail transaction is done. At the point of sale, the merchant calculates how much is owed by the customer and may prepare an invoice as well as offer different options for the customer to pay. Alyssa Henry (Seller Lead at Square) said, “Square for Retail gives business owners an easier way to digitize their retail operations so they have a firm handle on their inventory and are ready to reach their customers online or in-store amid COVID-19 and long after.” Square for retailers connects with Square Online in order to let retailers sell online, in-store, and on social platforms. The inventory tool lets businesses print barcode labels, track inventory across locations, create reports, and manage purchase orders. Also, this new system provides insights into inventory performance as well as tracks costs and monitors profits. Square for Retail allows businesses to get started for free.
CEO – Jack Dorsey
Jack Dorsey is the CEO and cofounder of Square and Twitter. He first launched Twitter while still in college and in 2010 he launched Square. In 2010, Twitter had over 105 million users who collectively tweeted around 55 million times a day. However, at that same time he became an investor in the social media networking company Foursquare and launched Square. Fast forward three year later and he became a billionaire after Twitter went public at $26 and the price quickly rose to $45 on the first trading day. By 2015, not only had Square IPO’d but he also returned to Twitter and served as CEO. He has been serving as CEO of both companies ever since and judging by the share price of both his companies, he seems to have his head on straight. More recently, he has been a part of a number of philanthropic efforts such as #TeamTrees climate change initiative where he provided funding for the planting of 150,000 trees. Jack is one of the most popular/well known CEOs along with people such as Elon Musk, Jeff Bezos, and more.
Cash App Lead – Brian Grassadonia
Brian leads Cash App and has been with Square for close to 11 years. He started off as a product manager and within 3 years quickly made his way up to Executive VP & General Manager of Cash App. Brian helped lead the launch of Square’s flagship credit card reader. Brian previously worked for Google where he facilitated new business developments, Slide as their Manager of Corporate Development, and UBS Investment Bank. He attended the University of California where he majored in applied science and management science with a minor in mechanical engineering.
Management team not mentioned in-depth – Amrita Ahuja (CFO), Jesse Dorogusker (Hardwear and Tidal Lead), Alyssa Henry (Seller Lead), and more.
What could go wrong
Bitcoin revenue slows down – As shown from Square’s consolidated statement of operations, bitcoin made up the strong majority of this company’s growth. While the level of growth we’re seeing is nice, a number of Cash Apps competitors such as Venmo offer the same exact service. There isn’t much reason to believe that Square will continue to be growing triple digits for much longer. Thus, it’s reasonable to be worried about Square’s business model without the help of bitcoin. I question as to how fast Square will be growing in the future when excluding bitcoin revenue. Can Square continue growing close to 50% without the help of their saving grace bitcoin?
What we want to see in the future
Square surpasses Venmo in annual payment volume – Cash App’s closest competitor is Venmo and as of right now, Venmo is winning in annual payment volume. The more volume that these payment apps report, the more revenue they get. Zelle is in a slightly different league because the major banks such as Bank of America and Chase default to using the Zelle platform when sending money. Thus, a more accurate comparison to Cash App is Venmo and they don’t seem to be much ahead. The chart below may be slightly outdated and doesn’t show all the competition, yet it still shows us where these companies are heading. When looking at Square’s and Venmo’s gross payment volume in Q1 2021, Venmo reported $51 billion while Square reported $33.1 billion. Something I noticed among my peers was that Venmo seemed to be the default payment service when sending money. Rarely did I hear people offer to send money through Cash App. Nonetheless, both businesses are growing but Cash App seems to be lagging. Investor’s that have a stake in Square stock are going to want to see higher growth rates than Venmo.
Square is an interesting company with a bright future in the financial services and digital payment sphere. Their CEO is highly ambitious and has made himself to be one of the most well known CEOs. With that being said, this company still has a number of drawbacks. Firstly, the amount of revenue coming from bitcoin transactions is really carrying this company in the direction of profitability. Additionally, this company faces competition from the likes of Venmo, Zelle, Paypal, and more. While Cash App is a major player in this space, from what I’ve seen Venmo is eating some of Square’s lunch. Although, I like the fact that their ecosystem of products continues to support the growth of larger sellers. Could it be that larger companies will continue to hop on the trend of choosing Square to do business with? While we don’t have the answer to that question, I’m optimistic Jack Dorsey will continue to rally support from larger companies. I don’t currently have a position in Square, but if this stock were to drop down to $180 I would consider starting a small position and add more as it drops lower.
Discounted Cash Flow and Select Ratios
Note – The exit point on the model I posted was set to 11/30/24. My computer ended up not saving after I set the exit to 2025 but when I did I got a similar valuation.
Connect with me on Twitter & Utradea
Things to look into to get a better understanding of this company:
Make sure to always do your own research before making any final decisions on buying any call or put options on a stock. I am not a CPA, attorney, insurance, or financial adviser and the information in this blog post shall not be construed as tax, legal, insurance, construction, engineering, health and safety, electrical or financial advice. If stocks or companies are mentioned, I sometimes have an ownership interest in them – DO NOT make buying or selling decisions based on my posts alone. If you need such advice, please contact a qualified CPA, attorney, insurance agent, contractor/electrician/engineer/etc. or financial adviser.