Shares of Square (NYSE:SQ) surged 13% last week to a new all-time high, after Guggenheim analyst Jeff Cantwell -- who hiked his price target from $75 to $100 -- named it the firm's "new best idea" and "highest conviction name" in fintech.

Cantwell believes that investors underestimate the revenue growth potential of Square's Cash App, the peer-to-peer (P2P) payments app it launched in 2015. Cantwell notes that the Cash App will continue to grow as it serves more "underbanked" users, and believes that it will be able to expand into the consumer finance, investing, and cross-border money transfer markets.

Square Register.

Square Register. Image source: Square.

More importantly, Cantwell sees the Cash App becoming a core pillar of growth for Square's growing services unit, which he believes could generate $1.02 billion of revenue in 2019. That's significantly higher than the consensus estimate of $868 million and would account for nearly half of Square's estimated sales for the year. Let's take a closer look at Square's services unit, and why it could become a billion-dollar business.

Understanding Square's services business

Square generated 77% of its GAAP revenue from transaction fees across its payment network last quarter, while just 16% came from its subscription and services revenue. The rest of its revenue came from hardware and bitcoin sales.

 

Q3 2017

Q4 2017

Q1 2018

Q2 2018

Subscription & Services revenue

$65 million

$79 million

$97 million

$134 million

YoY growth

84%

96%

98%

127%

Percentage of GAAP revenue

11%

13%

15%

16%

Source: Square quarterly reports. Chart by author. YoY = year over year.

Last quarter, most of Square's subscription and services growth came from its Instant Deposit feature, its Caviar food delivery service, the Square Capital lending service, the Cash App, and the Cash Card -- a physical debit card linked to the app.

Square didn't break down the business' exact revenue figures, but it revealed some growth rates. Its Instant Deposit volume hit $4 billion during the quarter, compared to $2 billion in the third quarter of 2017. Square Capital facilitated 60,000 business loans for $390 million, representing 22% growth from the prior-year quarter.

Caviar's revenue "more than doubled" annually, and over 25% of its food orders came from restaurants that were exclusive to the platform. Square for Restaurants -- a new platform that bundles Caviar with services for managing payments and booking tables -- also continues to grow, with 60% of participating restaurants jumping on board without the assistance of a salesperson.

A payment being made on a Square device.

Image source: Square.

Square also revealed that customers spent $250 million with the Cash Card in June, almost triple the amount spent last December and representing $3 billion in spending on an annualized basis. Earlier this year, eMarketer ranked Cash App as the third most popular P2P payments app in America after Zelle and PayPal's (NASDAQ:PYPL) Venmo.

However, a more recent estimate from Sensor Tower and Nomura Instinet found that Cash App's cumulative downloads had hit 33.5 million, which exceeded Venmo's cumulative total of 32.9 million. The data also indicated that Cash's user base grew three times faster than Venmo's in July. Nomura Instinet analyst Dan Dolev estimates that the Cash App could contribute up to $40 million (or 3%) of Square's adjusted revenue this year. Some of that growth is attributed to Square's support for bitcoin transactions, which neither Venmo nor Zelle support.

Square also continues to expand its subscription and services unit through acquisitions. It recently acquired the corporate catering start-up Zesty, which is being integrated into Caviar for Teams and Square for Restaurants, and Weebly, a website-building platform for small businesses. By bundling all these services together, Square can become a "one-stop shop" for digitizing a business.

But let's not get ahead of ourselves...

It's easy to see why investors are excited about Square's subscription and services unit. However, Square also faces a growing list of tough competitors as it expands that ecosystem. Its Cash App might be overtaking PayPal's Venmo, but Zelle -- which is promoted by a growing list of banks -- could limit its long-term growth potential.

Square for Restaurants faces competition from GrubHub (NYSE:GRUB), which is expanding its market-leading food delivery service into an all-in-one payments and loyalty services platform for restaurants. GrubHub controls 50% of the U.S. food delivery market, according to Second Measure, while Caviar controls just 4%.

Square's plans with Weebly could also fall short of challenging Shopify (NYSE:SHOP), which leads the market in "digitizing" offline businesses. Shopify already helps businesses launch e-commerce platforms, design websites, process payments, launch marketing campaigns, handle deliveries, and more -- so Square still has a lot of catching up to do.

Investors should always take analysts' estimates with a grain of salt. Square's subscription and services revenue is rising at an impressive rate, but it would need consistent triple-digit growth to hit Guggenheim's target. That could certainly happen, but investors shouldn't overlook the speed bumps which could throttle its long-term growth.

Leo Sun owns shares of Grubhub and Square. The Motley Fool owns shares of and recommends PayPal Holdings, Shopify, and Square. The Motley Fool is short September 2018 $80 calls on Square. The Motley Fool has a disclosure policy.