Twitter makes Dorsey look like a new-age fool, an easy target for Wall Street’s ire. This is true even though Dorsey is worth over $1 billion more than his fiercest critic, Elliot Management founder Paul Singer.
Square has been as good an investment as Twitter has been a bad one. The reason is Dorsey. He sets the strategy, hires the key people, then leaves them alone while he pursues the next big idea.
His latest big idea is Cash App, an app that has taken Square far beyond its beginnings as a payments processor. So far in 2020 its Cash App has given Square stock a 24% gain, while payment rivals like Visa (NYSE:V) and MasterCard (NYSE:MA) have been losing ground.
The Miracle of Cash
Square delivered a solid beat on estimates in its earnings report last week. It had adjusted net income of $110 million, 23 cents per share fully diluted, on revenue of $1.3 billion. The gains were driven by Cash, a mobile payment app which has added some investment features.
While most investor attention has been given to things like Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google Pay, Apple’s (NASDAQ:AAPL) Apple Pay and PayPal’s (NASDAQ:PYPL) Venmo, Cash App has been winning because of its added features. This includes support for bitcoin, which represented over $500 million in 2019 revenue, according to Square’s U.S. Securities and Exchange Commission 10-K report.
Since October, Cash App has also included support for investing, with fractional share trades as small as $1. This makes Square a direct competitor to Robinhood, which had a $7.6 billion valuation before a recent outage. Cash App now has 24 million users.
Square entered trade March 4 with a valuation of $34 billion. This has analysts calling it a “coronavirus hedge” even while its rivals get crushed.
While these rivals find themselves locked into niches like payments, transaction processing, banking, accounting or brokerage, Square treats all financial transactions as services. Like Apple, this makes them easy to understand and use.
Not a Hippie
Singer’s attack on Dorsey is based on the concept that he’s a hippie, not a finance guy. It’s more correct to say that Dorsey is Steve Jobs, while Singer is Gordon Gekko.
Dorsey has two strengths that Square magnifies. He sees change years ahead of other people, and he knows how to sell change through simplicity. No company has done as much in the last decade to disrupt the finance business as Square. It offers simple pricing, a combination of business services, and it understands money as a continuum, not a collection of silos.
Dorsey believes it makes sense to invest in Africa because the continent is young, scrappy and hungry. The median age there is 19.7, half what it is in the U.S. or even China. Yet Africa is divided among 54 countries, making trade difficult. A unified payment platform can lead to tighter economic integration and turbocharge growth.
Dorsey sees bitcoin as part of that platform. It can be easily converted into any African currency. It can be traded without friction, using smartphones most Africans have. He believes it will power the next stage in Square’s growth.
The Bottom Line on SQ Stock
By any conventional measure Square is overvalued. It has a trailing price-earnings ratio of 97, and it trades for more than 7 times revenue.
But SQ stock is the most unique play you can make in financial services. Jack Dorsey has forgotten more growth ideas at Square than Paul Singer has had in his whole life.
As the coronavirus from China continues to crush the stock market, wait for the bearish sentiment to crest. Then see if you can get in on Square at a reasonable valuation.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AAPL.