Please ensure Javascript is enabled for purposes of website accessibility

Square's Ecosystem Is Driving Its Earnings Growth

By Danny Vena – Updated Apr 10, 2019 at 3:50PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Along with a strong quarter, investors should focus on the long growth runway ahead for this fintech powerhouse.

Payments and financial technology company Square (SQ -1.63%) just posted another expectation-beating quarter, and sees plenty of opportunities to keep exceeding.

In its latest report, the company delivered adjusted revenue -- which excludes transaction and bitcoin costs -- of $464 million, up 64% year over year. That easily surpassed analysts' consensus estimate of $453 million and management's guidance range, which topped out at $451 million. Excluding the impact from the acquisitions of Weebly and Zesty in the second quarter of 2018, adjusted revenue increased 53% year over year. Adjusted earnings per share of $0.14 edged out expectations of $0.13, and was also just ahead of management's guidance for $0.12 to $0.13 per share.

Behind these impressive financial results is an expanding stable of products and services that will drive the next wave of growth.

A hand inserting a credit card into a Square terminal

Image source: Square.

It's the ecosystem

Many investors still think of Square in terms of its flagship Square credit card reader that attaches to mobile devices -- the one that started it all. Over time, however, the company product line has evolved into an entire ecosystem designed to empower business owners from novices to veterans, whatever the size of their operation.

On the conference call to discuss the results, CEO Jack Dorsey called the ecosystem the company's "core differentiator." Merchants or customers may come to Square for payments services or a mobile cash register, but they stay for the host of other products and services they find there. This includes small business loans, payroll services, invoices, and an online booking system -- among others. Instant Deposit, for example, allows both merchants and Cash App users to instantly deposit money into their bank accounts.

Check out the latest Square earnings call transcript.

But these peripheral offerings aren't just for show. Products and services launched in the past five years now account for 37% of total net revenue and 51% of the company's adjusted revenue -- up 15 percentage points compared to the prior-year quarter.

The Square Card is an area of current focus for the company. This business debit card is being offered in partnership with Mastercard (MA -0.85%). One of the revelations from beta-testing the Square Card was that 40% of the merchants that signed up for it hadn't used a business debit card before -- illustrating the need for this product.

Square card being held by artist Quest Skinner

Artist Quest Skinner uses the Square Card. Image source: Square.

This allows Square to serve "underserved and unbanked sellers," according to Dorsey. Previously, merchants were required to link a Square business to a bank account in order to get paid. Now, they can start a business without even going to a bank, as Square provides them with an account to store their funds and a debit card to access the money.

Driving the next wave of growth

Square isn't stopping there. After successfully building an ecosystem for entrepreneurs, the company sees a similar opportunity serving individuals. Dorsey announced that the Cash App had grown to 15 million monthly active users, more than doubling year over year, and said the company was also "building an ecosystem focused on financial services for individuals."

The Cash App was No. 17 of the top 20 free apps in Apple's App Store for 2018, with its growth driven, in part, by the network effect: Once someone uses it to transfer funds to other people, they encourage friends and family to download the app as well, which expands into an ever-widening network of users.

The company continues to invest in the development of new products, for both merchants and individuals. But it's also getting the maximum benefit from research it's already done. Each of the solutions the company develops results in technology that can be recycled. Dorsey pointed out that Instant Deposit and the Square Card were both developed using technology that was initially developed for the Cash App.

Among the themes that management touched on repeatedly during the earnings call were the size of the opportunity, and its intention to continue to invest to take advantage of this growing market. Investors should take a long view of Square, as the company is still in the early stages of what could be a decades-long growth trajectory.

Danny Vena owns shares of AAPL and Square. The Motley Fool owns shares of and recommends AAPL, Mastercard, and Square. The Motley Fool has the following options: long January 2020 $150 calls on AAPL and short January 2020 $155 calls on AAPL. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Block, Inc. Stock Quote
Block, Inc.
SQ
$54.99 (-1.63%) $0.91
Mastercard Incorporated Stock Quote
Mastercard Incorporated
MA
$284.34 (-0.85%) $-2.43

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
332%
 
S&P 500 Returns
104%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/01/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.