Square (SQ) is one of the most promising companies in the booming Fintech space. The company is building an impressive ecosystem of financial, merchant, and P2P services that is transforming the industry. While COVID-19 is having a negative impact on the seller economy, it is also accelerating the digitization of finance.
Square has built two robust ecosystems, one offers sellers a multitude of services/functions and the other caters to individuals’ financial needs with the powerful Cash App. Square’s leadership position in the Fintech industry should allow the company to thrive in an increasingly digital economy.
Square is reaching all-time highs despite an ongoing pandemic.
Square is at the forefront of an increasingly digitized economy. The company has managed to build some of the largest ecosystems in the sellers and payments industries through innovative technologies like the Square reader and the Cash App. While the pandemic is having a negative impact on the sellers ecosystem, it bolsters Square’s long-term value with the acceleration of digital solutions.
Square is set to benefit disproportionately from the digitization trend as one of the most recognizable brands in the Fintech space. The company’s Cash App, for instance, is rapidly cementing itself as one of the most dominant P2P platforms in the industry. In 2019 alone, Square’s Seller and Cash App businesses reported gross profits of $1.39 billion and $.458 billion, respectively. What’s more, the company’s gross profit continues to grow at an exponential rate and recorded a 40% CAGR over the past five years.
Square has seen its gross profit grow at an incredibly fast rate over the past five years.
The breadth of services in the Sellers and Cash App ecosystems are attracting a growing number of individuals. Square’s ability to act as a mobile payments provider, merchant services aggregator, and even a bank is allowing the company to tap into a huge addressable market. The incredibly diverse nature of Square’s offerings is largely unrivaled in the Fintech industry.
What’s more, significant network effects are starting to come into play with the growth of these ecosystems. The utility of Square’s services will only increase as more people start to use them. The Cash App will become particularly valuable as its number of users increase. Non-Cash App users, for instance, will be incentivized or even forced to use the platform if a significant number of their friends or acquaintances are already using the platform.
Large Untapped Potential
Square still has far more room to grow in the booming Fintech space. The company currently estimates the Seller and Cash App addressable markets to be ~$100 billion and ~$60 billion, respectively. Square has penetrated less than 3% of the Seller TAM and less than 2% of the Cash App TAM, which indicates that the company is still in its early growth stage.
The Seller ecosystem represents an $85 billion market opportunity in the US, with a $30 billion opportunity coming from software alone. On the other hand, the Cash App ecosystem has $9 trillion in potential addressable volume in the US. Square is well-positioned to take a disproportionate share of this massive market moving forward.
While COVID-19 is accelerating the shifts towards a digital economy, it is still presenting major hurdles for Square in the short term. The pandemic has had a particularly large negative impact on small businesses, which is a major contributor to Square’s sellers ecosystem. Individuals using the Cash App have also been negatively impacted by the pandemic. The coronavirus-induced downturn continues to negatively impact consumer behavior.
Square is also facing considerable competition in an increasingly crowded landscape. Payments giant PayPal (PYPL), in particular, is rivaling Square’s market dominance. PayPal’s Venmo continues to be a major force in the mobile payments industry and an increasingly large threat to the Cash App. In fact, PayPal recently recorded its best quarter ever largely as a result of Venmo.
Square faces stiff competition from the likes of PayPal and Stripe.
Square continues to grow at a breakneck pace despite the ongoing pandemic. The company reported a Q2 net revenue of $1.92 billion, which represents 64% Y/Y growth. Even at Square’s current market capitalization of $75 billion, the company still has far more room to grow.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.