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Can Square Be a Great Growth Stock?

By Jennifer Saibil - Updated Mar 3, 2021 at 3:47PM

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A mixed earnings report and tech sell-off made for an interesting week for Square.

Square (SQ 7.00%) has had mixed results throughout the pandemic that are representative of its varied business. The company's fourth-quarter earnings continued the trend, and investors were happy enough to keep bidding up its stock. But after the stock's recent surge, should they be confident about Square's growth opportunities?

What does Square do?

Square is a fintech (financial technology) company that operates two payment-related ecosystems. Its classic sellers business, which comprises business solutions such as its famous square card reader, has seen slowed growth during the pandemic from its strong storefront presence. Revenue increased 5% and gross profit increased 13%.

A Square client with a point-of-sale device in a store.

Image source: Square.

The company invested in omnichannel capabilities to reach more clients and offer greater options for storefronts, and omnichannel gross payment volume increased by a third, accounting for half of the total. Square sees mid-size businesses as a huge addressable market, and this category demonstrated high potential for profitability, with gross profit growing at double the rate of other categories. 

Its Cash App ecosystem was a huge success as people began to rely more heavily on digital payments while under lockdown. But it was Bitcoin (BTC -2.45%) that made the biggest splash on Square's business. Revenue for the company increased 141% in Q4, but without Bitcoin, is was only up 23%. 

In the fourth quarter, Cash App active customers increased 50% over 2019 to 36 million, and Square only spent $5 per customer in acquisition cost. There are 80 million customers who have transacted at least once with the Cash App system, and Square is focusing on creating greater value for customers to keep them loyal. Its results so far indicate that new transacting customers adopt other Cash App features like Cash Card and Bitcoin trading in greater numbers. It's also a key to greater profitability, as gross profit per customer increased 70% over the prior year in the fourth quarter.

Bitcoin is increasingly becoming an important part of Cash App. Bitcoin trading grew more than 250% year over year, and Square bought $190 million of the cryptocurrency in the fourth quarter, because it sees it as a necessary internet currency. CEO Jack Dorsey said on the recent earnings call, "We believe it has the highest probability of empowering more people in the economy in a fair way." So long as Bitcoin's price is flying, it's great for Cash App.

So is growth finished?

The short answer is no. 

Storefronts struggled during the pandemic, but as lockdowns ease, seller business revenue and GPV should see higher growth. Electronic payments are still in their infancy, and Square is still in high-growth mode, especially Cash App.

The best indication of growth, in my opinion, is its ease in pivoting into new businesses, especially ahead of the curve. Its white square card reader was a real and useful innovation when it was launched, and Cash App expanded its operations with user-friendly features. The focus on Bitcoin makes Cash App somewhat risky, as we saw high volatility in its stock price last week. But it was also a harbinger of the current obsession with cryptocurrency, and if that changes, Square is likely to make that decision faster than others.

About the stock price

Shares of Square trade at an outrageous valuation of roughly 600 times trailing-12-month earnings. But it has rewarded investors in the past, gaining more than 400% over the past three years. Considering the company's bright future, I still think it can continue to deliver growth.

 

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