Financial-technology company Square (SQ +2.43%) put to rest any concerns about its ability to keep up its rapid growth when it posted its fourth-quarter results. Posting its fourth consecutive quarter of accelerating revenue growth, investors have good reason to take a good look at what's driving this uncanny growth.
Though there's much to be gleaned from the financial figures in Square's fourth-quarter earnings release, investors shouldn't overlook some of the important topics discussed in Square's shareholder letter and conference call. Here are three topics investors should take the time to consider.
Square Register. Image source: Square.
Demand is strong for Square Register
In October, Square announced Square Register -- the company's "first fully integrated point of sale with hardware, software, and a payments platform all in one device." As a point-of-sale hardware product aimed to better serve the needs of higher volume sellers, the new product could help the company accelerate its rising favor with large sellers.
Square provided an update on Register in its fourth-quarter shareholder letter, noting that "Pre-orders of Square Register in the fourth quarter were strong, but the revenue impact will be seen in the first quarter of 2018 because shipping did not commence until the end of the fourth quarter."
Square Register could notably give Square's hardware business a lift in 2018. Hardware revenue fell 6% in 2017 compared to 2016, which benefited from the launch of Square's contactless chip reader. But the more important trend to watch will be whether Register can help Square expand its ecosystem to more large sellers.
Attracting new customers with new products
One of the advantages of Square's emphasis on continually expanding the financial-technology products and services it offers is that each new product or service creates a new opportunity to attract a customer it otherwise might have never appealed to. Even better, Square can then upsell these new customers to other products and services in its growing ecosystem.
In Square's fourth-quarter earnings call, CFO Sarah Friar explained how this works:
If you look at some of our newer products like Loyalty, like retail Point of Sale, like Payroll, they're actually acting as a new door to Square, too. So what we see is net new sellers coming in perhaps using one of those products first. And then our goal is how do we ultimately upsell them back into Payroll and Point of Sale. And it has to be because there's utility because when they are using payments and point of sale, we can make something like Payroll easier for them because we're already doing Employee Management. So absolutely, we see a lot of these virtuous cycles being created. And thus, the ecosystem continues to grow.
The Cash App's network effect
Square's Cash App shouldn't be underestimated. Not only is more than one out of every three transactions already monetized, but Square's payment and transaction ecosystem that stretches across buyers, sellers, and employers is creating a strong network effect that makes the Cash App more valuable with every transaction. Further, every new transaction is driving further customer adoption.
Square CEO Jack Dorsey explains:
One of the other things we're really excited about, which gets into the longer-term ambition, is every Friday, we see a significant bump because of payday. And this, to us, indicates a strong network effect. So we see a bump in terms of sign-ups and also downloads and usage. As people are getting paid, they're sending money to their friends, they're receiving money from their family and continues to further densify the network.
Cash App. Image source: Square.
All three of these topics -- Square Register, the importance of Square's new products and services, and Cash App's powerful network effect -- are important items for investors to continue watching throughout 2018. Given Square stock's pricey valuation, investors should look for all three of these factors to continue contributing positively to Square's growth story.
