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The Biggest Reason Square’s Stock Could Keep Climbing

By Matthew Frankel, CFP® - Updated Sep 20, 2018 at 8:41AM

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Square just hit an all-time high, and not necessarily because of its core payment-processing business.

We recently learned that Square's (SQ 6.39%) Cash App surpassed Venmo in total downloads for the first time ever, and Square's stock price quickly soared to a new record high. And I believe the high share price is well justified.

Although the Square Cash App isn't a huge revenue driver for the company right now and might never grow into a game-changing profit machine itself, it could represent a multibillion-dollar opportunity for Square in other ways. Here's a rundown of how the Cash App is doing, why it could be a massive source of long-term profits for Square, and why its user base could continue to grow from its already impressive level.

Person using Square Cash app on mobile phone.

Image Source: Square.

Square Cash's impressive stats

According to the latest data, the Square Cash peer-to-peer payment app reached 33.5 million downloads after July, surpassing PayPal's (PYPL 2.70%) Venmo app for the first time ever.

Square has been aggressively investing in the growth of the Cash App by adding features such as the Cash Card debit card, which has been growing rapidly in popularity. In fact, the cash card launched just over a year ago, and customer spending tripled in the six-month period ending in June. It also added the Cash Boost rewards program that offers discounts at certain merchants, and the app also allows customers to store money in bitcoin in addition to U.S. dollars.

The Cash App is the No. 1 finance app in the App Store and continues to surge in popularity. While I referred to it as a peer-to-peer payment app earlier, it has evolved into much more.

$100 million in sales would be nice, but ...

While we don't know exactly how much of Square's total revenue came from its Cash App, it's probably not much. In fact, with aggressive initiatives such as the Cash Boost rewards program (which Square is currently paying for), the Cash App could actually be quite a money drain on the company for the time being. That's OK, because growing its user base is the priority, and in this area, the company has been highly successful.

One analyst told CNBC recently that Square's Cash App could grow to $100 million or more in annual revenue by 2020 "even without deeper active user penetration." This alone would be a pretty big boost to Square's top line. Based on the second quarter of this year, Square's annualized adjusted revenue is a little more than $1.5 billion.

However, while an additional $100 million revenue stream would certainly be a boost to Square's profitability, I wouldn't exactly call it a game changer for the company. The real game changer would be the other ways Square could monetize its Cash App users.

Why Square Cash's user base could drive the company's future success

To be fair, while the Square Cash App has been downloaded 33.5 million times, not all of the people who have downloaded it are active users. Earlier this year, Square said that the Cash App had 7 million active users in the month of December 2017. An active user is defined as a user who either received or sent money during the month, so even if this number hasn't grown since December, this is a pretty big user base. By comparison, there are about 2 million users of Square's payment hardware. This is a big group of customers.

Here's the point. Square has some interesting up-and-coming business segments that it could use to capitalize on the success of its Cash App. In fact, at a recent conference, Square CFO Sarah Friar said that "anything you do today with a bank account, you should look to the Cash App to begin to emulate more and more of that."

Friar mentioned that savings products and stock-trading services were among the possibilities. She mentioned that Square Cash users are storing large amounts of money on the app and that the company wants to figure out how to help them put their money to work in more effective ways.

One particular example that could translate into game-changing revenue is the Square Capital business-lending platform. If you aren't familiar, Square Capital lends money to the company's payment-processing customers. The platform has been successful so far but is still relatively small -- during the second quarter, Square Capital originated about 60,000 loans totaling $390 million.

Square could easily use its Capital platform to create a personal lending solution for its Cash App users. And while the lending business is still growing rapidly, even based on the current conversion rate (about 3% of Square's payment hardware users), similar success with the Cash App active user base would translate to more than 200,000 personal loans per quarter.

Furthermore, Square has openly discussed its plans to apply for a banking license, so it could potentially offer other revenue-generating banking products to the millions of Cash App customers already. Square could also eventually offer a credit card product to its Cash App (and business) customers. Many other potential financial products and services could be part of Square's consumer-facing business in the future as well (Square Mortgage, perhaps?).

Additionally, if it gains serious traction, the Cash Boost platform could evolve from a money drain into a revenue-generating marketing engine capable of reaching millions of customers.

Square's financial ecosystem could get bigger than many people think

The bottom line is that by rapidly growing its Cash App user base, Square is acquiring millions of new people to join its ecosystem. The Cash App itself isn't likely to be a game-changing revenue generator, but its users could prove to be tremendously valuable to Square over the long run.

As a final thought, 33.5 million downloads are extremely impressive, but this could just be scratching the surface of Square Cash's potential. There's still lots of room for growth, especially in international markets. For example, the Cash App just launched in the U.K. three months ago and is starting to gain traction. So 33.5 million downloads and 7 million active users could be just a starting point.

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