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Square's CFO Says Cash App Was Too Profitable in 2020

By Adam Levy - Dec 9, 2020 at 11:07AM

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Here's what management plans to do about it.

The Cash App has been a major bright spot for Square ( SQ -5.64% ) in 2020 as its Seller business faces various challenges from the COVID-19 pandemic. While gross profit growth on the Seller side of the business slowed to single digits through the first three quarters of 2020, Cash App gross profit has nearly tripled. In the third quarter, Cash App gross profit continued accelerating, improving 212% year over year.

While management expects that growth to moderate in the fourth quarter and into 2020, CFO Amrita Ahuja still admits the company could've done more to capitalize on the success of Cash App. "Frankly, that's probably too fast in terms of margin progression," she said at a recent investors conference.

A person inserting a debit card into a card reader.

Square's Cash Card. Image source: Square.

Going after the bigger prize

Ahuja says there's a $60 billion addressable market for Cash App in its existing products and markets. As of the end of the third quarter, Cash App was on a run rate of $1.74 billion, excluding bitcoin transactions.

There's a lot of room for Square to keep growing Cash App. 

To its credit, Square's user base and product adoption have improved considerably over the last few years. It now counts 30 million monthly active users, about 7.5 million of whom use the app daily. The percentage of monthly users transacting daily has steadily improved as Square expands the product ecosystem as well, reaching 23% at the end of the third quarter.

Square has been extremely cost-effective at bringing in new users. Its customer acquisition cost is about $5 per net new active user, and its payback period is less than one year. Square acquires most users organically through the network effect, offering a small monetary incentive to users to get their friends to sign up. The greater incentive is the utility of the product -- fast peer-to-peer payments at the core.

But with Square's expanding Cash App product ecosystem -- which now generates over $45 per user per year in revenue -- there's an opportunity to spend more on customer acquisition and scale the business to reach more of its addressable market. Considering the massive margin expansion it saw in 2020 -- Ahuja expects Cash App to be profitable on an adjusted EBITDA basis this year -- there's now money to reinvest in growing the user base with more traditional marketing.

Lots of opportunities for growth

There are still a lot of opportunities to grow Cash App's user base. VP of Cash App Brian Grassadonia said 80 million people have transacted on Cash App in the history of the product. That means 50 million people have used the product before, Square knows who they are, and they're a prime target for reengagement. Moreover, he points out that there's still three-quarters of the United States who haven't even tried Cash App.

There are also opportunities to improve engagement on Cash App. As mentioned, only about one-quarter of monthly active users are using the app daily. Adding more utility to existing products or creating new products can increase that ratio.

Ahuja already shared plans to invest in marketing and product for Cash App during the company's third-quarter earnings call. She said the company will spend an additional $850 million in operating expenses next year, about 60% of which will go toward Cash App. And two of the biggest focuses of those investments will be marketing and product.

Square's gross profit margin expanding "too fast" is a great problem to have. The fintech company faced this same challenge with its Seller ecosystem over the years as well. The real challenge is that the solutions -- growing the user base and expanding the product ecosystem -- rarely have a significant effect on profit margin. A bigger, more engaged user base has historically offset the increased investments in marketing and product. It wouldn't be a surprise if Cash App actually grows even more profitable in 2021.

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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