One of the great growth stocks over the last half-decade has been Square (SQ 3.19%), the electronic payments company. It has become a go-to payment processor for businesses large and small, and has built a suite of products to make businesses easier to run and financial transactions easier for consumers.
What's incredible about the company today is that it's just scratching the surface of its potential.
Image source: Square.
Square's booming business
Processing payments has always been the core of Square's business, and its transactions continue to grow. Gross payment volume was $112.3 billion in 2020, up 6% from a year ago despite a sharp decline in in-person transactions.
Cash App business transactions grew as a percentage of payment volume too, hitting 9% in Q3 and 8% in Q4, more than double their share a year earlier. The Cash App has become a key growth product as well. The revenues it generated grew by up 502% to $2.17 billion in the fourth quarter, while its gross profit rose 162% to $377 million.
There are essentially two ecosystems being built at Square. One is a seller ecosystem of payment processing services, software tools, and lending that makes running a business easier. The other is for consumers, and combines everything from payment processing to investing into one app. It's the combination of these two ecosystems that makes Square a great growth stock to hold for the long term.
The emerging digital wallet
Ultimately, Square's largest growth driver will be consumers using the Cash App to fulfill more and more of their financial services needs. It started as a peer-to-peer transaction app, but it can now be the center of your digital financial universe. Consumers can use it to buy and sell stocks, deposit paychecks, buy Bitcoin, and pay businesses for goods and services.
Electronic transactions have been around for a long time, but there was often an intermediary between the parties involved. A business that takes credit cards or Apple Pay goes through Visa (V 3.06%) or Mastercard (MA 3.58%) and an intermediary bank to complete the transactions. Most of the approximately 3% fee paid on these transactions goes to the credit card company or a bank, with a company like Square earning about 1%. But Square is trying to offer services to both sides of the transaction.
The idea is to be the center of both businesses' and consumers' finances. If it can succeed with this strategy and build scale, it can disrupt banking and the transaction industry, reducing fees for businesses while increasing its own revenue in the process.
Square has made finance easy
What's remarkable is how much easier Square has made financial matters. A few clicks and you can invest in stocks, do your banking, and even manage your taxes. The company's financial results speak for themselves.
SQ Revenue (TTM) data by YCharts
Square is still near the beginning of its growth cycle, and as it expands its services and its scale, its potential is almost unlimited. That's why this is a stock I'll never sell.
