2020 has been a year of historic volatility for the stock market, with dramatic highs and lows, companies propelled to fame and fortune, and others pushed to ruin. Investors have been trying to make the best decisions based on the new normal, and part of that is understanding how business is changing and where it's going.
One clear direction is digital payments, which became increasingly relevant during the pandemic. But another one is the ability to mix physical and digital payments, allowing businesses to offer more options, thereby making more sales, and making it easier for customers to get what they need. One company that's moving right along with both trends is Square (NYSE:SQ). Square's stock is already up more than 150% year to date, and as it keeps climbing, it may become 2020's best profit opportunity.
Why it's going places
Square's business is a microcosm of global business trends. It makes payment systems for small and medium-sized businesses, and it enables mobile payments through its popular Cash App. While the company's original products were geared toward physical stores, it has segued into complete e-commerce plans, including full store creation, from website design and setup through payment systems. It considers itself a financial equalizer, enriching and empowering businesses and individuals through its seller and cash ecosystems.
While marketing is often about convincing customers to buy products they never knew they needed, Square is good at bringing customers solutions they wish someone had thought of. For example, Square began with its little white card reader, which allows small businesses to take credit card payments with smart phones. This was revolutionary at the time, and Square was able to see a better way to take payments and use technology to improve and simplify operations for small businesses. Since then it has created software and hardware products to help businesses operate. The company positively exploded in relevance over the past few months as businesses have needed to fulfill orders digitally or in a hybrid model. Square upped its game during the pandemic and quickly launched curbside pickup, delivery, and other e-commerce tools into its platform.
The company took a risk when it launched its Cash App to compete against PayPal Holdings' Venmo. But Cash App has become way more popular. It lets customers pay, buy, bank, and invest easily. Revenue from Cash App grew 381% year over year to $1.2 billion. Although it maintains an ecosystem of its own, it works together with Square's other services for smoother transactions and higher sales.
Getting its customers through the pandemic
Square's revenue grew 64% to $1.92 billion in the second quarter ended Aug. 4. Much of the growth was powered by Bitcoin trading as seller volume decreased, with small businesses suffering while spending declined. But businesses rapidly galvanized to go digital, and digital sales increased as a percentage of the total as more sellers got online. Gross payment volume from digital channels increased 50%. Cash App outperformed during the quarter, growing to 30 million active users, with an increasing portion using the app's cash card.
Square's valuation is sky-high, trading at 250 times trailing 12-month earnings. But I'm not skeptical about this, because there's every reason to believe that Square will keep up the momentum, gaining more customers as it expands its services. The company sees a $100 billion addressable sellers market and a $6 billion addressable individual market, giving it ample room to grow. As the economy restarts for small businesses and trends keep moving toward digital, Square just might be the most profitable growth stock on the market in 2020.