Fueled by Cash App, Square Stock Has an Impressive Long-Term Trajectory

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Square (NYSE:SQ) is often viewed as one of the premier names in payment processing, but its fintech credentials and SQ stock are being bolstered by the rising popularity of Cash App, one of the fastest-growing financial services mobile apps.

Fueled by Cash App, SQ Stock Has an Impressive Long-Term Trajectory

Source: Jonathan Weiss / Shutterstock.com

Over time, Square is continuing to capture higher dollar transactions from a wider array of businesses, but the payment processing industry is a volume business and Square’s core constituents remain small medium-sized businesses.

SQ stock more than doubled off its March lows, a move defying skeptics asserting the stock is vulnerable to weakness in small- and medium-sized businesses. On the payment processing front, those are Square’s bread and butter and some analysts are voicing concerns about how those businesses will look following the novel coronavirus pandemic.

Cash App Will Drive SQ Stock

Investors familiar with Square and astute minds know an important factor about the stock: Cash App isn’t just a secret sauce. It’s a real, long-term growth driver for the fintech company.

For those not familiar with Cash App, it’s akin to PayPal’s (NASDAQ:PYPL) Venmo and if you’re not familiar with either, the long and short of Cash App and Venmo is that these are fintech apps (two of the most widely downloaded financial services apps of any type) that allow people to send and receive money without the encumbrances of cash, check writing or going into a bank branch.

Essentially, Cash App is what’s called a digital wallet, a fintech segment with exponential growth expectations for the years ahead.

“Cash App is the second-largest peer-to-peer payment application and digital wallet in the US,” according to ARK Investment Management. “Initially a side project born out of a Square hackathon, today the Cash App is one of Square’s most important assets, contributing roughly 12.5% to its revenue. Operated like a startup, Cash App has a distinct culture but enjoys the benefits of Square’s global scale.”

ARK Investment Management runs the ARK Fintech Innovation ETF (NYSEARCA:ARKF), an actively managed exchange-traded fund, the one with the largest weight to Square and one of the best-performing financial services ETFs over the past couple of years.

The Bottom Line on Square Stock

Rightfully so, Cash App is garnering more attention as accretive to the Square story, but there’s a chapter going overlooked: for many Cash App users, the app is their bank account. Not everyone uses a traditional bank and Cash App fills that void for millions of Americans, though with some geographic concentration.

“The Cash App’s US geographic concentration is in the south,” according to ARK. “In 2018, several reports highlighted that Square’s Cash App was especially popular with low-income consumers in cities like Atlanta where unbanked rates are high.”

A major reason, again one that doesn’t get enough attention, that this is important is that cost of customer acquisition for Cash App and Venmo. Say $20 a head, notes ARK. Conversely, a traditional bank pays spends $1,500 for a single customer.

However, markets don’t value digital wallet customers at levels anywhere close to figures assigned to regular bank patrons, indicating that although Square is a growth stock, it might be a value play, too.

Cash App is vital to the Square thesis for another reason: it can act as an offset for possible company revenue declines at a time of weakness for some small businesses that were hit hard by the coronavirus.

“Square is likely to see significant offset from its Cash App, with revenue for this business up 197% year over year in the first quarter and management noting that this area saw strong increases in April,” according to Morningstar. “The online nature of P2P should help to insulate this business in the near term, and provide ballast for the overall business.”

Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.

Todd Shriber has been an InvestorPlace contributor since 2014.


Article printed from InvestorPlace Media, https://investorplace.com/2020/05/sq-stock-impressive-long-term-trajectory/.

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