There is no question long-time shareholders of Square (NYSE:SQ) stock haven’t been accustomed to underperformance.
Yet here we are with three months left in 2021, and it’s sitting on a 6% return, or roughly half the performance of the Dow Jones Industrial Average. Over the past five years, recorded an increase of 86%.
SQ stock set the bar high. For anyone who’s held for the past five years, be patient. Help is on the way.
Here are three ways Square’s stock returns to its usual winning ways.
SQ Stock and Organic Growth
Every business worth its salt finds ways to grow without resorting to outside influences. Square is no different. That’s why the work it’s done over eight years to develop Cash App, its peer-to-peer payment service and answer to PayPal’s (NASDAQ:PYPL) Venmo, is impressive.
For example, in the second quarter, Cash App generated a gross profit of $1.8 billion over the trailing four quarters. In addition, in June, Cash App reached 40 million monthly active users, almost double what they were in Q2 2019. Moreover, that number has increased for four consecutive years.
Cash App revenue was $3.33 billion in the second quarter, 177% higher than Q2 2020. Now, most of that was Bitcoin (CCC:BTC-USD) revenue, but of the n0n-Bitcoin revenue, the Cash App Business gross payment volume increased by 107% to $111 million, while subscription and services-based revenue rose 83% year-over-year to $495 million, or 71% of its overall subscription and services-based revenue.
Something from nothing.
Capital Allocation Through Acquisitions
In the second quarter, it completed its $302 million acquisition of a majority stake in Tidal, the music and entertainment platform owned by Jay-Z. At the time of the deal’s announcement in March, Square CEO Jack Dorsey explained the company’s thoughts on the matter.
It comes down to a simple idea: finding new ways for artists to support their work. New ideas are found at intersections, and we believe there is a compelling one between music and the economy.
Square continues to push the envelope on innovation. It might seem like a strange purchase, but the Cash App customers it is going after will gravitate to things like Tidal. So, it’s less counterintuitive than one might think.
However, it is the company’s Aug. 1 announcement that it will acquire Afterpay (OTCMKTS:AFTPY), the Australian buy-now-pay-later company, for $29 billion that jumps out at investors.
Wisely, Square is paying for the acquisition of 100% of the company in stock. So, if I’m an Afterpay insider getting SQ stock, I’d be thinking of hanging on to it for the long haul.
Again, it all flows back to the Cash App ecosystem.
“Together, we can better connect our Cash App and Seller ecosystems to deliver even more compelling products and services for merchants and consumers, putting the power back in their hands,” Dorsey stated in its press release announcing the acquisition.
As Page 10 of Square’s presentation on the deal points out, BNPL has a penetration rate of just 2%. There is plenty of opportunity in its existing markets – Australia, New Zealand, U.S., Canada, UK, Spain, Italy, and France – as well as other countries around the world. With $693 million in revenue in 2021, they’ve barely scratched the service.
Between Square Seller and Cash App, the union of the two businesses will help the company become a more global presence. Also, it doesn’t hurt that Afterpay doesn’t charge interest for its BNPL offering, opting for capped late fees instead. For diligent individuals, this is a much better proposition.
Square reminds me of the Campbell’s (NYSE:CPB) Soup label. It would make small changes each year so that its customer base wouldn’t get upset with a total makeover all at once. Jack Dorsey is doing the same thing with Square.
In 10 years, you won’t recognize it. And that’s an excellent thing for shareholders.
Here Comes the TikTok Partnership
On Sep. 28, Square announced it is partnering with TikTok to help their customers expand their online sales by integrating the short-form mobile video platform that allows users to go from TikTok videos right to a merchant’s existing Square Online store.
“With a billion monthly active users, TikTok is one of the world’s fastest growing social media platforms. Reaching this audience provides sellers with a valuable opportunity, especially as the lines between entrepreneurship, content creation, and commerce continue to blur,” Square’s press release stated.
It might not seem like a big deal, but again, if you go back to the Campbell’s Soup can idea, Square is doing a lot of little and big things that will positively impact its customer’s businesses over time. If they win, Square wins. It’s that simple.
I continue to be impressed by Square’s ability to think strategically about its future while doing the little things in the here and now to move the ball down the field.
Its stock might not be reacting to the incremental moves it’s made. But, rest assured, five years from now, Afterpay shareholders will be happy they took SQ stock in the sale of their company.
Square remains a top-notch, long-term hold.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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.
