3 Reasons This Fintech Stock Could Crush the Market

It's been over a decade since Square (SQ 4.20%) released its first chip reader, making the digital economy more accessible to small businesses. And since going public in 2015, shares have skyrocketed over 2,080%, crushing the returns of the broader market. Even so, digital payments and e-commerce are still in their early stages of adoption, and Square's days as a disruptor are far from over.

Here are three reasons this fintech stock could continue to crush the market.

Image source: Square

1. The Seller ecosystem simplifies commerce

Traditionally, small businesses have relied on a patchwork of systems and services from different providers. Not surprisingly, this can cause trouble with compatibility and maintenance, and inefficient non-digital tools are often an easier option.

To solve this problem, Square provides an end-to-end solution, including hardware, software, and financial services: the Seller ecosystem. This platform helps merchants manage their businesses across physical and digital storefronts, providing tools that range from payment processing and payroll to financing and customer loyalty.

Not surprisingly, Square's cohesive approach to commerce has translated into strong growth.

Data source: Square SEC filings. TTM = trailing-12-months. CAGR = compound annual growth rate.

Going forward, I think Square can maintain this momentum. Its advanced point-of-sale (POS) software -- designed for retailers and restauranteurs -- is gaining traction with larger merchants (i.e. greater than $500,000 in annual sales). In fact, this demographic represented just 24% of gross purchase volume (GPV) in Q4 2018, and that share has since ticked up to 35%.

Moreover, Square is still building out the Seller ecosystem. For instance, the company is expanding beyond its five core geographies, as it recently launched its omnichannel platform in Ireland and opened early access for merchants in France. And in July, the company introduced Square Banking, adding two new deposit accounts (savings and checking) to its existing lending service.

To summarize, the Seller ecosystem simplifies commerce, and Square is executing on a strong growth strategy. That should help the company gain market share in the years ahead, and capitalize on what management believes is a $100 billion opportunity.

2. The Cash App flywheel is gaining speed

In 2013, the Cash App debuted as a peer-to-peer payments product, but it has since evolved into an ecosystem of financial tools for consumers. Today the platform unifies banking and brokerage services, allowing users to deposit paychecks directly, then send, spend, and invest that money from a single mobile app.

This business model creates a flywheel effect: As Square adds new products and services, more consumers find value in the Cash App; and as its user base expands, the Cash App becomes increasingly profitable, furthering Square's ability to invest in new services.

This virtuous cycle is compounded by improving user engagement. For instance, consumers who trade stocks through the Cash App are more likely to engage with the Cash Card or Bitcoin, and users who trade Bitcoin are more likely to use direct deposit or the Cash Card. In short, each new service drives an uptick in both users and user engagement.

That dynamic has translated into strong growth.

Data source: Square SEC filings. TTM = trailing-12-months. CAGR = compound  annual growth rate.

This flywheel effect not only makes Square more profitable, but also more efficient. Case in point: Banks typically pay $1,500 to acquire the average customer, according to data from Ark Invest. But Square paid less than $5 to acquire Cash App users in 2020. That gives the company a tremendous advantage.

Looking ahead, management believes the Cash App addresses a $60 billion market, and as Square adds new services to its ecosystem, the resultant synergies should help the company capitalize on that opportunity.

Image source: Getty Images

3. The Afterpay acquisition could supercharge growth

Recently, Square announced its plans to acquire Afterpay for $29 billion in stock. If you're not familiar with the company, its buy now, pay later (BNPL) platform provides interest-free financing to consumers at checkout, allowing them to pay in four installments over six weeks.

Despite the hefty price tag, this deal could accelerate Square's growth in a big way. Nearly 100,000 retailers worldwide already offer Afterpay. And Square plans to turn its Cash App into a discovery tool, helping consumers find merchants and BNPL offers. This should supercharge user engagement, spinning the flywheel that powers the Cash App.

Moreover, Afterpay also boosts merchant sales by 7.7%, according to research from Accenture. That's why Square plans to integrate this BNPL service into its Seller ecosystem. Once this happens, the company (and its merchants) should see an uptick in revenue.

The bottom line

Square makes the digital economy more accessible for both merchants and consumers, and management is executing on a strong growth strategy across the Seller and Cash App ecosystems. Even so, Square has hardly scratched the surface of its $160 billion (and growing) market opportunity. That's why this fintech stock could crush the market over the long term.