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The Most Important Number in Square’s Fourth-Quarter Earnings

By Matthew Frankel, CFP® - Updated Apr 11, 2019 at 4:19PM

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Hint: It’s a part of the business that isn’t making much money yet.

Square ( SQ -6.64% ) released its fourth-quarter earnings recently, and the numbers looked pretty strong all around. Adjusted revenue grew by a staggering 68% year over year, and gross payment volume continued to increase at a rate of nearly 30%. Subscription- and service-based revenue continued to be a big standout, more than doubling from the same quarter a year ago.

However, it's not Square's core revenue generators that has me most excited. Instead, it's a part of the business that's likely to be losing money -- the Cash App.

Person using Cash App on mobile phone.

Image source: Square.

Impressive user growth

Square doesn't report monthly active users for its Cash App very often -- we hadn't heard any active-user figures since last year. We did hear that Cash App surpassed Venmo in terms of total downloads in mid-2018, a huge accomplishment, but it doesn't give much insight as to how many people are actually using the app on a regular basis.

Well, along with its fourth-quarter letter to shareholders, Square reported that Cash App now has 15 million active users. This is more than double the active users of just a year ago. In a nutshell, not only are millions of people downloading the Cash App, but about half of the people who have downloaded it are using it on a regular basis.

Check out the latest earnings call transcript for Square.

Why it's such a big deal

The Cash App isn't a big moneymaker for Square right now. In fact, given some of the promotional tools Square is using (such as giving money-saving offers to users), the company is likely to be losing money on its app for the time being. And that's OK. Square shouldn't care about the profitability of its app right now while it's growing at such a breathtaking pace. Here's why.

Square has been rolling out new products left and right over the past couple of years, but for the most part, these have been geared toward businesses. In other words, Square still makes the bulk of its money from its business-oriented products like payment processing and the Square Capital business-lending platform.

However, that's not the extent of Square's future ambitions. The company has publicly said that a big part of its long-term plans includes greatly expanding its consumer offerings. Square could offer high-yield savings accounts, an investment platform, and several types of consumer lending, just to name a few possibilities. And thanks to the Cash App, the company is building up a massive active user base that it could use to eventually cross-sell other products.

An ecosystem with virtually unlimited potential

Square's main competitive advantage when it comes to its core business-focused offerings is its ecosystem. Merchants can use Square's payment-processing services to accept card payments, use Square Capital for their financing needs, offer customers installment financing through Square Installments, and pay for purchases with the new Square debit card product, among others. This has been a wildly successful strategy, and keep in mind that Square's small-business customer base is about 2 million in size.

Now, imagine if Square created a similar ecosystem of products for consumers that had 15 million customers (and that's not taking into account future user growth). This is why the Cash App is such a key piece of Square's future success, and why the company is still in the early innings of realizing its full potential.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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