Square (NYSE:SQ) has a major hit with its Cash App ecosystem driving the company’s revenue and profits higher despite the recession. SQ stock is a winner because of Cash App’s growth and will likely push the stock even higher.
Square stock has skyrocketed, almost doubling in the past three months to $125.75 as of July 27. Cash App played a huge part in this success.
This growth will power Square stock even higher, despite its meteoric rise in the past quarter.
Skyrocketing Cash App Growth
For example, in Q1 Cash App accounted for $528 million of the company’s $1.38 billion revenue or 38.2%. Moreover, it accounted for $183 million or 40% of its gross profits.
Almost a year earlier in Q2 2019, Cash App was only 26% of total net revenue. In fact, without bitcoin transactions, Cash App revenue represented only 11.5% of the total. Moreover, Cash App’s gross profit was just $2 million or less than one half of one percent.
Here is the point. Cash App grew from $1 million in revenue in Q2 of 2016 to $528 million in Q1 2020, 38% of total quarterly sales. That is less than four years.
In less than one year, its gross profits have risen from less than 1% to 40% of the total. In Q2, Cash App likely pushed gross profits even higher. I suspect they now account for over half of total gross profits.
Giving People What They Want
This new ecosystem takes Square away from its traditional B-to-B sales systems. In fact, they now call it the Seller ecosystem. On the other hand, the two ecosystems have one thing in common.
They both make money by taking a rake or “take” on the gross payment volume. With Cash App, Square makes money by charging fees mainly to business accounts when money is transferred to a business.
Recently Cash App has been adding all kinds of new features, from helping people with their stimulus checks to investing, to debit cards, and loans, etc. This is on top of peer-to-peer transfers which remain free. But the idea is to gather eyeballs, loyalty, and ingrain Cash App into people’s individual finances.
What Analysts Say About SQ Stock
Barron’s recently wrote that Piper Sandler analyst Christopher Donat likes Square stock because it is one of the fastest-growing payments companies. In the past 5 years, its gross profits have risen over 40% annually. This solid user base helps Square with recurring revenue.
The Cash App business is helping with the downturn in their small business transactions as a result of the coronavirus recession. When Square reports its results for Q2 sometime in the first week of August, this will likely become more apparent.
Nevertheless, Square stock is up a lot in the past three months. Cowen analyst George Mihalos downgraded the stock recently as a result. According to Seeking Alpha, he says that it has “more than priced in all the good news from the Cash App business.”
Not everyone agrees. One Street analyst did a sum-of-the-parts analysis and said Square stock is worth $131. But that is only 4% or so above the price today, July 27, at $125.71 per share.
What To Do With SQ Stock
I think there is no question that Square’s Cash App is going to continue to grow. The gross profit margin of 34.6% in Q2 2020 is also likely to grow.
In fact, I highly suspect that in five years Cash App could dominate the company’s earnings. Essentially it would make Square a copy of PayPal (NASDAQ:PYPL).
Here is a simple way to think about the possibilities. PayPal has a $202.6 billion market capitalization. Square has a $53 billion market cap. As Cash App grows in popularity, I suspect that Square could reach Paypal’s market value, 4 times its present value.
Let’s say that market cap growth takes five years from now. If you use a little algebra, that works out to an annualized growth rate in Square stock of 31.95% per year for five years or roughly 32% per year. If it takes only four years, it works out to a rise of 41.4% per annum.
That implies Square stock might be a really interesting growth play over the next several years. Mainly due to the Cash App.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide, which you can review here.
