Square (NYSE:SQ) provides seller tools and financing to small- and medium-sized consumer-focused businesses, as well as a peer-to-peer payment app geared toward individuals.
Square's share price was battered at the peak of market panic, down 63% from $87.25 in February to a low of $32.33 in March. Yet in April, Square reversed the trend, notching a gain of 24.4% according to data provided by S&P Global Intelligence.
A major factor in the March drop was the closure of brick-and-mortar businesses around the country -- Square's bread-and-butter customers -- due to the coronavirus crisis.
Part of the rise in April could be attributed in part to a simple snap back after a market overreaction, and in part to growing confidence that government stimulus programs will help Square's customers stay in business. But another significant factor is investors may have come to realize the growth potential of Square's Cash App.
The Cash App is helping support Square while the seller ecosystem, which includes card readers, Square POS software, Square Dashboard, Square Card, Square Capital, and Square Payroll, has basically ground to a slow crawl. The Cash App facilitates peer-to-peer payments, and also provides a free Cash Card that works like a debit card but is linked to the user's Cash App balance instead of a bank account.
By the end of December 2019, the Cash App had 24 million monthly active users, up 60% year over year. Cash App activity resulted in total net revenue of $361 million, an increase of 147%, and gross profit of $144 million, increasing 104%, year over year in the fourth quarter of 2019.
Not only is Square seeing rapid growth in Cash App active users, but also growth in average user revenue. At the end of December 2019, average annualized user revenue was $30, compared to $15 at the end of December 2017.
Square's extreme short-term price movement has attracted attention, and after analyzing the segments of the company and its overall response to COVID-19, we can see growth opportunities where it seemed there were none. The Cash App side of the business is shifting the risk/reward equation.
Square is expected to announce first-quarter 2020 earnings in early May, though no date has been confirmed. The results will bring more clarity to the effect of the coronavirus shutdown, and the velocity of the Cash App's growth.
I think Square's current valuation presents an attractive entry point for investors who are capable of absorbing volatility in the near term. Customers in the seller ecosystem will gradually come back online, and new ones will become part of the Square family. Assuming the Cash App continues its growth trajectory, and the seller side of the business recovers, we may not see the stock price this low again.