Square (NYSE:SQ) went public in Nov. 2015, and the fintech company has already generated massive multibagger returns for its investors. It listed its shares at $9.00 but opened at $11.20 on its first day of trading. If you'd bought 111 shares at the IPO price with $1,000, your investment would be worth nearly $27,000 today. 

But sticking with Square has required a lot of patience. The stock dipped below its IPO price in 2016 and went through some fierce rallies and ugly pullbacks before reaching roughly $240 as of this writing. Let's see why the bulls overwhelmed the bears, and whether or not that trend will continue in the future.

How Square became a fintech giant

Twitter co-founder Jack Dorsey and his friend Jim McKelvey launched Square in 2009. The company was born after McKelvey, who co-founded a glass blowing factory, told Dorsey about his frustration with his inability to close a $2,000 sale, because he couldn't accept credit cards.

Square's Register.

Image source: Square.

That problem inspired Square's development of card-processing dongles for smartphones, which have since expanded to iPads and stand-alone registers. Its hardware business disrupted the market for traditional POS (point of sale) devices and tethered merchants to Square's expanding platform of cloud-based business management tools. It also enabled its offline merchants to launch online storefronts.

Starbucks was initially one of Square's top customers, but the coffee chain ended its partnership with Square in 2015 to expand its own payments platform. That divorce cast some doubts on Square's future growth, but the company continued to lock in small and medium-sized businesses.

Square's approach was similar to PayPal's. It charges merchants fixed fees for each transaction and pays the underlying credit card's swipe fees, which range from 1.3% to 3.5% in the U.S. To generate a profit, Square's fixed fees -- which now range from 2.6% to 3.5% plus additional fees of $0.10 to $0.30 per transaction -- must cover those swipe fees and other expenses. The critics initially argued it would be difficult for this business model to generate stable profits.

Increasing its scale and expanding its ecosystem

Yet Square continued to grow. Between 2015 and 2020, Square's annual GPV (gross payment volume) more than tripled from $35.6 billion to $112.3 billion. At the end of 2020, 60% of its GPV came from "larger sellers" that generated more than $125,000 in annual GPV, compared to just 39% at the end of 2015. That percentage rose to 61% in the first quarter of 2021.

The secular demand for simple offline and online payment services is driving that growth. Square's add-on services -- which handle payrolls, email marketing campaigns, loyalty cards, gift cards, and more -- are also increasing the stickiness of its ecosystem.

Square expanded into the consumer-facing peer-to-peer payments market with its Cash App in 2013. It expanded the app with bitcoin trades in 2018 and free stock trades in 2019, and the company plans to add tax-filing services to the app with its recent acquisition of Credit Karma.

The Cash App's number of active users skyrocketed from three million in 2016 to 36 million in 2020. Cash App's bitcoin trading revenue offset the slower growth of Square's payment processing business during the pandemic last year, but that lower-margin revenue squeezed its profitability.

However, the Cash App's gross profit still soared 168% year over year to $1.23 billion in 2020 and accounted for 45% of total gross profit. By comparison, its seller ecosystem's gross profit only rose 8% to $1.51 billion, though the segment could recover quickly in a post-pandemic world.

Will Square continue to grow?

Square's annual revenue rose from $1.27 billion in 2015 to $9.50 billion in 2020. Excluding its massive bitcoin revenue throughout the pandemic, Square would have generated $4.93 billion in revenue last year.

Analysts expect the company's top line to soar 111% this year, led by a post-pandemic recovery in its seller business and more bitcoin tailwinds, before rising another 14% to $22.8 billion next year.

Back in 2015, Square posted an adjusted EBITDA loss of $41 million. But in 2020, it generated a positive adjusted EBITDA of $474 million. Analysts expect Square's adjusted earnings to rise 79% this year and 40% next year -- economies of scale are clearly kicking in and stabilizing its bottom-line growth.

Based on those estimates, Square trades at 115 times its 2022 earnings estimate. That P/E ratio might seem high, but it should cool off as the company's profitability improves. In terms of revenue, Square still trades at less than five times next year's sales -- which makes it cheaper than other high-growth tech darlings, some of which are trading at more than 30 times sales.

Square's growth rates make it a powerhouse in the "war on cash," and its rapidly expanding ecosystem suggests it could generate even more multibagger gains for long-term investors who can stomach some near-term volatility.

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.