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Here's Why I'm More Excited Than Ever After This Fintech's Second-Quarter Earnings

By Matthew Frankel, CFP® – Aug 13, 2021 at 6:56AM

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This company has already delivered 20-bagger returns for me, but I don't plan to sell.

Square (SQ 1.21%) has delivered incredible gains for early investors, but the company's growth and market opportunity certainly justify it. In this Fool Live video clip, recorded on Aug. 2, contributor Matt Frankel, CFP, discusses Square's latest results with Industry Focus host Jason Moser, and explains why he isn't planning to sell a single share of the fintech giant. 

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Jason Moser: In regard to the quarterly results, because earnings came out along with this press release, and I was looking through those numbers for the quarter, Matt. And it was another really impressive quarter. I do think that the market likes this deal and perhaps, that's part of the enthusiasm behind the stock today. But I also believe that this was another strong quarter and really showed the rebound, particularly in that physical retail side, like you've talked about before. There was a pretty strong rebound in spending through Square's networks.

Matt Frankel: You really hit the nail on the head there because there is a big rebound here. Square, unlike PayPal (PYPL -2.87%), is more based on physical merchants. There's a lot of online businesses at Square, but they're very concentrated in physical retail. Gross profit was up 91% year over year. It's not that they grew by 91%, it's that the business rebounded because the second quarter of last year was pretty terrible for any type of physical retail. They were very profitable this quarter, that was a big standout to me, was just the profitability of the business. Over $200 million in net income is one of the highest totals the company has ever posted. Comparing things to a couple of years ago, if you look at the gross payment volume of $38.8 billion in the seller ecosystem, that's almost 50% higher than it was at the same quarter in 2019 before the pandemic.

Moser: Wow.

Frankel: They are up by 50% over pre-pandemic levels. They still have almost $7 billion in cash on the balance sheet, which remember: They're not spending a dime on the Afterpay acquisition, that's all stock, so they're keeping that. One stat that stood out to me, and I'll end with this one on Square's earnings, on the Cash App side, I mentioned earlier that they hit 40 million active users. Their gross profit per active user now was $55 in the second quarter, so $55 per active user. That's 2 1/2 times as much as it was pre-pandemic. Square is doing a much better job of monetizing its Cash App user base, which is the key to profitability, as we're seeing reflected in the results. I like the quarter, I'm much more of a fan of their quarterly numbers than I am of the Afterpay acquisition. I'm not totally sold on the acquisition. I think it's a good fit, but I think they might be overpaying a little bit, but the numbers look great. Their business keeps growing and they're clearly rebounding. They're clearly a big beneficiary of the reopening. I can see that continuing for the rest of the year. Because if you remember, the first half of the second quarter was still pretty socially distance and masked up and capacity limitations. It wasn't until midway through May or so when most places started lifting their requirements.

Moser: Yeah. Even just a little bit. One thing I noticed, and I'd be interested in your perspective here because I am wondering if this is something that would be more temporary in nature just given what we've gone through over the past year and the economic stimulus that's been passed along: I saw inflows per monthly transacting active customer. Those inflows nearly doubled compared to a couple of years ago. They noted that these inflows, the gross in the inflows to the Cash App customer is really the primary driver of Cash App gross profit growth. We've seen a lot of inflows here for obvious reasons. Plenty of stimulus. Square has proven itself to be a part of the solution in giving people quicker access to their money. But I wonder: Could there be a lull in those inflows that we should expect over the course of the next year as we see monetary policy tighten a little bit? Obviously, stimulus won't be as significant. The flip side to that is that the employment picture continues to gain steam and people are just using those tools that Square is providing through Cash App. Those inflows keep coming. I wonder if there is maybe not a headwind there on the horizon in regard to those inflows.

Frankel: That's a good point. The goal is for Square to convert those inflows into lasting relationships that use other parts of their business. It's a question of whether they'll be able to do that successfully. Think of it in the context of Zoom (ZM -1.43%). Obviously, not everyone is going to have virtual meetings for ever and ever after the pandemic, but it gets people into their ecosystem that they can then use to sell other products and services to, and that's really where the big value is coming from. The same thing applies here. It's the pandemic really. It's not going to last where people are saving their stimulus checks, because I don't see three or four stimulus checks per year coming indefinitely. That's not the point, though. The point is that that money brought people into Square's ecosystem because they made it very easy for people to deposit their stimulus checks and things like that into the accounts and really could bring people into their ecosystem that they could cross-sell different services and products. It's like, "Oh, you deposited your stimulus check? Become a brokerage customer, make some investments through here, buy some Bitcoin." Engagement is really the key, and it seems so far like they've been able to engage their new users really well. It's a question of whether that will continue. The inflows, there will absolutely be a lull, unquestionably. We'll see what happens with the customer engagement and how well that all the new people they brought into the Cash App ecosystem in the past year and a half or so will translate into revenue down the road.

Matthew Frankel, CFP owns shares of Square. The Motley Fool owns shares of and recommends PayPal Holdings, Square, and Zoom Video Communications. The Motley Fool recommends the following options: long January 2022 $75 calls on PayPal Holdings. The Motley Fool has a disclosure policy.

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