Over the past three years, shares of payment-processing company Square (SQ 3.38%) have risen by 425% -- a remarkable increase in such a short amount of time. During this time, Square has grown from a niche manufacturer of payment-processing solutions to a major fintech powerhouse.

While the stock's gains are certainly justified, is there much more room to grow, or is Square's stock already priced for perfection?

Businessman with arm outstretched and handful of money.

Image source: Getty Images.

Square's gains have been well-deserved

When I wrote about Square a few years ago, I had to clarify what the company was -- "you know, those little credit card readers you see sticking out of vendors' iPhones." But such a description is no longer necessary. People know what Square is.

Here's a snapshot of how Square has grown in recent years. Over the past three years, Square's core payment-processing business has grown gross payment volume (GPV) by 137% and Square Capital has increased its quarterly loan origination rate by 229%. This is in addition to other business lines that have grown substantially, such as Caviar, Cash Card, and more.


Q3 2015

Q3 2016

Q3 2017

Q3 2018

Gross payment volume (GPV)

$9.5 billion

$13.2 billion

$17.4 billion

$22.5 billion

Square Capital loan originations

$123 Million

$208 million

$303 million

$405 million

Adjusted revenue

$118 million

$178 million

$257 million

$431 million

Net income

($54 million)

($32 million)

($16 million)

$20 million

Data source: Square shareholder letters.

As a result of this growth, Square's adjusted revenue has increased by 265%. And although Square is clearly prioritizing growth over profitability, the company generated a small profit during the most recent quarter while it had previously been operating at a loss.

Lots of future catalysts

Obviously, no company can keep up a 50%-plus year-over-year revenue growth rate forever, but Square could certainly sustain it for the next several years, at a minimum. There are simply tons of future growth avenues that could send its revenue soaring higher. Just to name some of the biggest:

  • The most recent quarter's GPV represents an annualized rate of $90 billion. While this represents massive growth in the past few years, it also represents about 2% of the global card payment volume. So it's fair to say that there's still significant runway for growth in Square's core business.
  • Square Capital has more than tripled its origination volume over the past few years but it still represents a small fraction of the nearly $200 billion small-business loan market. Plus, there's widespread speculation that the company could get into personal lending, which is currently a $120 billion market itself and growing.
  • Square's Cash App recently surpassed Venmo in terms of total downloads and has about 7 million active users. Square hasn't made much of an effort to monetize its Cash App users yet, choosing to focus on growth instead, but former CFO Sarah Friar has said that Square wants to expand its consumer-finance offerings. This could include brokerage accounts, checking and savings accounts, and other consumer-debt products. The total U.S. consumer-debt market is $12.9 trillion in size, so there's tons of potential here. In fact, the Cash App could have the most long-term potential of any of Square's current products.

This is just a partial list. Square's Caviar foodservice platform is growing fast, and the company is just starting to put effort into the online-payments space. Plus, Square just recently launched its Square Installments product, which allows sellers to offer installment financing to creditworthy customers.

The point is that, while Square has certainly grown impressively, the current revenue stream could be just the tip of the iceberg.

High valuation, but there could be much more growth to come

By most valuation metrics, Square's stock looks expensive. With a $19.3 billion market cap, Square trades for a price-to-sales ratio of 13.7 and about 23 times its book value. Although the company just recently became profitable, annualizing the third-quarter's net income produces an astronomical 241 price-to-earnings multiple.

Still, Square has tons of room to grow and is doing a pretty excellent job of capitalizing on its opportunities so far. Profitability may be lacking right now, but as Square grows and begins to better monetize its products, the current valuation could look dirt cheap.

While Square isn't as attractive as it was when it was trading in the $10 range a couple of years ago, it could still be a fantastic long-term growth investment. As current Square shareholders have experienced during the past few months, the path won't be straight up, but this fintech up-and-comer still has lots of upside potential.