October has been a tough month for Square (NYSE:SQ). Its stock briefly topped $100 in late September, but three developments this month torpedoed its progress. First, Square's introduction of Installments, a feature that lets customers pay for large purchases in fixed monthly payments, raised concerns about its credit risk, even though the company is selling those loans rather than keeping them on its balance sheet.
Second, CEO Jack Dorsey sold over 103,000 shares of Square stock in early October. That wasn’t worrisome on its own, since it was pre-planned, but it exacerbated the selling pressure.
Lastly, CFO Sarah Friar, who guided Square through its IPO and was widely seen as the architect of the company’s fintech strategy, announced that she would resign to become the CEO of Nextdoor. Square's stock tumbled 10% during after-hours trading on Oct. 10 following the announcement.
As a Square investor, the first two issues don’t worry me, but the loss of Sarah Friar does. Friar was often Square's public persona and seemed to be the logical successor to CEO Jack Dorsey, who leads both Square and Twitter. Without Friar, Square's fintech plans face an uncertain future.
Friar's accomplishments at Square
Prior to joining Square in 2012, Friar was a managing director at Goldman Sachs in Silicon Valley and an SVP at cloud giant Salesforce. In a press release, Dorsey stated that Friar "steered us through an IPO and helped build a growing ecosystem of businesses that will scale into the future."
When Friar joined Square, its core product was the Square Reader, a smartphone dongle that could process credit cards. Square subsequently launched the Square Stand, which converted iPads into POS (point of sale) systems, in 2013; and the Square Register, a standalone POS system, in 2017.
Square also expanded its POS platform into a full-blown fintech ecosystem during those years. It added customer relationship management (CRM) software, payroll services, food deliveries (via Caviar), HR and inventory management tools, e-commerce and web design solutions, Instant Deposits, small business loans (via Square Capital), and other features -- which could be bundled together to lock in customers.
It also bundled many of those features together in Square of Restaurants, which merged Square's payments, Caviar deliveries, and analytics services onto a single platform. The introduction of Installments was merely another extension of this fintech ecosystem.
On the consumer front, Friar oversaw the launch of the Cash App, a peer-to-peer payments app that recently topped PayPal’s Venmo in cumulative downloads, according to Sensor Tower and Nomura Instinet. The company also launched a physical debit card, Cash Card, which was linked to the app, and added bitcoin trading to the platform.
Friar’s long-term vision for Square
At Recode’s Code Commerce conference in September, Friar stated that Square was exploring "lots of ideas" for expanding that ecosystem -- including savings products and brokerage services. Those comments suggested that Square could evolve into an online bank and challenge online brokerages like E*TRADE and Robinhood.
During last quarter's conference call, Friar stated that Square was "building an ecosystem of financial services for individuals in the same way that we did for businesses." Friar also highlighted three key areas where Square would invest its money: the omnichannel market, which consists of more bundled services for businesses; the financial services market, where it can add more services to the Cash ecosystem; and the international market, which remains fragmented among regional players.
Friar also emphasized that Square was "investing today for businesses that can be really material to the top and bottom line over the next two to three years." That’s why Friar's abrupt departure is deeply troubling -- if her successor scales back those expansion efforts due to fears about credit risks or near-term earnings growth, Square could fail to reach its full potential.
Time to worry?
Friar's departure is disappointing, and I personally think Dorsey should have promoted her to CEO. That would have allowed Friar to execute her long-term vision for Square, while giving Twitter a full-time CEO -- boosting both stocks in the process. I don't think investors should sell Square based on Friar's departure alone, but they should follow the CFO search and see if her successor follows through on her expansion strategies.