The advent of the cashless economy as a result of the pandemic has been a boon for Square (NYSE:SQ). After a 225% rally in its share price in the last 12 months, Square stock is in for greater upside.
One of the fintech company’s biggest growth drivers is its subsidiary, Cash App. The platform experienced a massive surge in traffic, accounting for $2.07 billion of Square’s revenue in the previous quarter. Adding to this momentum, Square now allows users to store and trade Bitcoin (CCC:BTC-USD) on its platform.
With cryptocurrencies gaining significant momentum recently, this will result in some hefty gains for Square stock in the coming years.
Square Stock by the Numbers
Very often stocks that experience a massive rally in their share prices don’t have the valuation to back it up. But the same can’t be said about Square that saw tangible improvements in its profit and revenue margins during the fiscal year.
In its third quarter, the company reported net revenue of $3.03 billion, which was up 140% from the prior year. This spike in revenue can be attributed to its subsidiary Cash App that saw a 212% increase in its growth levels.
The platform’s strong run this year shows no signs of slowing down. In Q3, Cash App had 30 million active users and a total of 90 million downloads as of 2020. While this number isn’t as high as competing platforms, Cash App caters to a much broader ecosystem. The platform allows users to send and receive money and even distributed government stimulus checks during the pandemic.
In addition to this users can also invest in stocks, Bitcoin and earn rewards for using ATM cards.
A second tailwind for the company is its e-commerce business. Square’s Seller ecosystem allows users to set up an online store, reach potential customers and apply for business funding. Although this segment isn’t as lucrative as its digital payments system, it does show a lot of potential.
According to a report by Seeking Alpha, the Seller ecosystem has a total addressable market of $100 billion. This is $40 billion higher than the individual payments ecosystem, making it a major growth opportunity for Square.
Square’s Bitcoin Play
For the last few years, there has been an increase in the mainstream adoption of cryptocurrencies. This bodes well for Square that added a Bitcoin feature to Cash App in 2018. With digital payments taking over a cashless economy this year, the company saw its Bitcoin revenue surge to $1.63 billion or a 1,000% increase (year-over-year).
This rise in cryptocurrency usage helped boost activity on Square’s Seller platform while also adding to its Cash App user base.
In more recent news, Square stock saw some big gains after Bitcoin surged past $50,000. Shares of the company were up 10% on Monday. This spike came after Tesla announced its $1.5 billion investment in Bitcoin and said it will accept the currency as a form of payment for its cars.
Square has also been a long-time advocate of crypto with the company purchasing $50 million worth of Bitcoin in October 2020. In a statement Square’s CFO, Amrita Ahuja has said that it “has the potential to be a more ubiquitous currency in the future.”
The Bitcoin feature serves as a great complement to Square’s high-growth Cash App platform. With greater adoption of the currency in the coming years, this could be a major revenue generator for the company.
The Bottom Line
With a thriving digital payments ecosystem, an emerging Sellers ecosystem and a loan financing program, Square definitely has a lot going for it. The push towards a cashless economy is a trend that will continue long after the pandemic, according to many experts. This environment enables Square to elevate its growth levels by expanding its core offering.
Analysts predict Square keep up its impressive momentum this year. Sales revenue this year is expected to rise by 33%. Adding to this, the return of in-store shopping will further boost high-margin transactions aka Square’s core business.
Although Square stock is priced high at roughly 220x estimated earnings, the sheer innovation and growth potential make this stock a great long-term play.
On the date of publication, Divya Premkumar held a long position in SQ stock. She did not hold (either directly or indirectly) any positions in the other securities mentioned in this article.
Divya Premkumar has a finance degree from the University of Houston, Texas. She is a financial writer and analyst who has written stories on various financial topics from investing to personal finance. Divya has been writing for InvestorPlace since 2020.
