Square's (NYSE:SQ) Cash App is worth between $27 billion and $30 billion in enterprise value, according to an estimate from MoffettNathanson analyst Lisa Ellis. By contrast, the rest of Square's business is only worth $23 billion to $26 billion by the same estimate.
Cash App's user base is growing rapidly, and Square is monetizing its users extremely well. The company said it was on pace to generate $30 per year on average from its 24 million Cash App in December. Ellis sees the service reaching 60 million users within five to seven years with Square generating $85 to $90 in revenue per user each year. That would mean it generates over $5 billion in annual revenue, nearly nine times the amount it generated in 2019, excluding bitcoin.
The biggest growth driver
Square's Cash Card will be the biggest factor driving monetization for Cash App. Square said 20% of Cash App users had the Cash Card in their wallets as of the end of 2019. Ellis sees that climbing to 50% by the time the app reaches 60 million active users.
Cash Card generates revenue through interchange fees collected by Square every time a user swipes their card. That revenue accounts for a growing portion of Square's subscription and services revenue for Cash App, which reached $222 million in the first quarter. Ellis sees Cash Card revenue climbing to $2.5 billion when it reaches 30 million users.
Beyond generating revenue in its own right, Cash Card has had positive effects on Cash App's entire suite of features. Square is purposefully cannibalizing its Instant Deposit feature with Cash Card. So instead of transferring money from Cash App to a more traditional financial institution, more users are leaving their funds in Cash App. As of the end of April, Square had $1.3 billion in user funds held in Cash App.
More users holding funds in Cash App opens the door for services like Invest, which allows users to buy stocks or bitcoin. Square doesn't generate a profit off of that service, but there's room to monetize it. Increasing transaction volume on Invest would enable Square to generate meaningful revenue by selling customers' orders to market makers. That's a key business for other brokerages with no commissions. Square could also offer premium services like options trading and access to margin for a subscription fee like Robinhood, another popular fintech platform.
Beyond Invest, Square also sees the potential for other financial services offered by traditional banks. And to the extent Cash Card gets more users to keep funds in their accounts, Square can offer them more services.
Cash App could be even bigger still
Ellis says her model doesn't include potential product expansions. For example, Square clearly has its eye on the peer-to-peer market in Europe. It launched Cash App in the U.K. in 2018 and recently acquired Verse, which is based in Spain and operates throughout Europe. Ellis hasn't modeled Cash App outside of where it currently operates. Greater international expansion could open the door for more robust remittance services.
Square could grow Cash Card adoption even more if it leveraged its seller ecosystem to offer additional rewards. For example, Square offers sellers who use its Square Card product (the Cash Card equivalent for merchants) a 2.75% rebate on purchases from other Square sellers. That's a better cash back rate than most credit cards, and it could grow adoption for both Cash Card and Square's seller services.
The company is also working to transform its current Cash Card rewards program, Boosts, into a money maker instead of a loss leader. Square currently funds most of the cash back offers available as a means to drive Cash Card adoption. But it's increasingly reaching out to businesses to fund Boosts as a form of advertising. Moving to a sponsored Boosts model will provide a substantial bump to Cash App's EBITDA margin.
Cash App has grown rapidly over the last couple years, but it's only scratched the surface of its potential.