If you own shares of Square (NYSE:SQ), you might want to pay closer attention to the GameStop (NYSE:GME) trading saga playing out at online brokers across the country. Amazingly, the retail uprising could provide Square stock with a little push higher.
That’s because traders annoyed with Robinhood’s decision to prohibit customers from buying fractional shares of GameStop and 12 other companies might wander over to Square’s Cash App to do their stock shopping.
Frankly, I think the entire GameStop situation is stupidity run rampant, but that’s life in the big city. In the end, it does point out how the democratization of the markets comes at a cost.
Someone will be left holding the bag other than the giant hedge funds these so-called retail investors are furious with. It’s 100% guaranteed.
As for Square, it provides the company with a nice marketing opportunity. Whether it chooses to take advantage should tell us a lot about its plans for the investing element of its biggest growth vehicle.
The GME Run and Square Stock
In the short-term, it might get some new customers who fear missing out. But that’s not the target customer. Square is interested in forming banking relationships with as many people as possible who have downloaded Cash App.
As ZDNet points out in a recent article about 2021’s most disruptive innovations, digital wallets like Cash App are a $4.6 trillion opportunity.
“ARK [ARK Investment Management] estimates that digital wallets represent a $4.6 trillion opportunity in your pocket. ARK points to Venmo, Cash App, and venture funded startups who are likely to upend traditional banking by activating the mobile phones — the bank branches — in users’ pockets and handbags,” ZDNet contributor Vala Afshar wrote on Jan. 29.
“According to ARK’s research, digital wallets are valued between $250 and $1,900 per user today but could scale to $20,000 per user, representing a $4.6 trillion opportunity in the US by 2025,” Afshar continued.
Naturally, if this were to happen, Square stock would be among the prime beneficiaries.
The people at ARK are very bright. If they’re looking at this happening, there’s a good chance we’ll get there. That, more than anything, will add billions of market capitalization to Square’s valuation.
Not stock trading.
Cash App Has Guardrails
Square’s stock trading rules prohibit major day trading.
“When you buy stock using Cash App Investing, you are limited to the buying power of your Cash App balance and your Add Cash limits,” Cash App’s day trading limits page states.
It also limited a person to three day-trades (buying and selling the same stock in the same day) over a rolling five-day span.
Benzinga Staff writer Wayne Duggan discussed the possible defections on Jan. 28. He specifically highlighted that Square also restricted trading on Cash App that day, but there could be a segment of Robinhood users that will defect to make a point.
“Cash App is geared toward younger, more inexperienced traders, so there is tremendous overlap with the Robinhood user base,” Duggan wrote. He went on to say the app’s user base was approaching 24 million people, rising threefold in just two years. The company’s “Cash App Investing” service just launched in December.
In my latest article about Square stock, I suggested SQ was likely to see $300 before the end of 2021. I commented that since launching its stock trading platform on Cash App about a year ago, 2.5 million customers had bought stock.
In August 2020, Robinhood reached 13 million users. If 1% of those users defected to Square, that would mean an additional 130,000 Cash App customers. These Cash App users tend to be more profitable for the company. A 5% increase in the number of customers using its stock trading platform isn’t an insignificant number.
We will see how this shakes out.
The Bottom Line
I’m a big believer in Square’s ability to continue to disrupt financial services. That said, I’m not sure stock trading is an area where it will make a real difference in the near term.
However, I am sure the powers that be (including CEO Jack Dorsey) are actively considering how to take advantage of this moment for the long haul.
Either way, SQ remains a buy.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
