Please ensure Javascript is enabled for purposes of website accessibility

Why Square Stock Can Still Move Higher

By Travis Hoium - Jun 22, 2021 at 1:55PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Square's business is just getting started.

Square (SQ -1.40%) has been one of the most disruptive fintech stocks of the last decade, becoming a key payment processor as well as a provider of service for businesses and digital financial tools for consumers. 

As disruptive as Square has been, primarily in the point-of-sale market, it might just be getting started in its evolution into a complete financial services company. It can now offer loans to banks, deposit accounts for customers, stock investment accounts, and even cryptocurrency trading. We may be starting to see how Square could be the center of millions of people's financial lives, and that's where its true value will be unlocked. 

Square reader on a bakery counter.

A Square reader on a bakery counter. Image source: Square.

Sellers are the core

Providing payments and other services to businesses has always been Square's core, and it's a great business to be in. In the first quarter of 2021 alone, the company reported $33.1 billion in gross payment volume and $964 million in gross profit.

Not only does Square take a cut of every payment processed through its point-of-sale system, but the company also actually makes more money on subscriptions and services than from processing payments. In the first quarter, Square generated $469 million in gross margin from subscriptions and services while the payment processing gross margin was $435 million. 

The biggest opportunity for Square long-term isn't just adding services and processing more payments, it's getting both businesses and consumers to use Square's products in higher numbers and turning that into higher profits

Buyers are the future

The business transaction business is growing, but the future of Square may be dependent on the Cash App, the consumer finance app that offers everything from banking to crypto to stock investing. 

Financially, what gets the most attention is Bitcoin (BTC -1.14%), which generated $3.51 billion in revenue in the first quarter of 2021, although it added just $74.9 million in gross profit. 

What's crucial is customers using the Square app in larger numbers. If they do, Square could offer lower fees than the traditional 2.6% cut for customers who use Square payment processing and accept the Cash App. This is done by cutting out other intermediate steps like credit card companies and bank fees. Square could also offer lower fees to businesses and still generate better margins on each transaction.

We don't know exactly how the Cash App will make money long term because it's in the early phases of adding new services, but it has a lot of options. Stock investing could be a big business, crypto trading is already generating a lot of revenue, and Square could add more traditional banking services as its deposit base grows. This could ultimately be the biggest digital-only bank in the world. 

Disruption is what Square does best

The financial services industry is ripe for disruption as physical bank locations and ATMs become less important. Square is in an enviable position because it's able to offer businesses a full suite of tools and services, and it can provide consumers with a number of financial products through the Cash App.

As Square matures, I think it will continue expanding financial offerings that have traditionally been performed by banks. Checking, savings, and expanded crypto and investing options are already being built, but there's no reason we won't see loan products expand from businesses to consumers. Personal loans, auto loans, and even mortgages could soon be key growth drivers for Square, and this company might become the most important financial institution in the country. 

SQ Revenue (TTM) Chart

SQ revenue (TTM) data by YCharts. TTM = trailing 12 months.

Square stock isn't cheap at nine times sales and 330 times earnings. But with revenue up 764% over the last five years and margins expanding, it still has a lot of upside and I think it's worth the premium it's getting on the market today. 

Travis Hoium owns shares of Square. The Motley Fool owns shares of and recommends Bitcoin and Square. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Block, Inc. Stock Quote
Block, Inc.
SQ
$86.72 (-1.40%) $-1.23
Bitcoin Stock Quote
Bitcoin
BTC
$24,129.96 (-1.14%) $-278.87

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
400%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/15/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.