Please ensure Javascript is enabled for purposes of website accessibility

How Does Square Make Its Money?

By Matthew Frankel, CFP® and Brian Withers – Updated Sep 2, 2021 at 9:56AM

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

Here's a closer look at Square's income statement to help understand exactly where the revenue comes from.

Fintech giant Square (SQ 9.11%) has several different ways it generates revenue, and many investors don't really understand how much comes from each source. In this Fool Live video clip, recorded on Aug. 23, Fool.com contributors Matt Frankel, CFP, and Brian Withers take a close look at Square's latest income statement to give investors a better feel for how this massive financial disruptor makes its money.

10 stocks we like better than Square
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

They just revealed what they believe are the ten best stocks for investors to buy right now... and Square wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

 

*Stock Advisor returns as of August 9, 2021

 

Matt Frankel: This is their income statement. Look at this far left column, that's what we're going to be paying attention to. This is the most recent quarter, the three months ended June 30, 2021. This is the second quarter. This is how Square's revenue is broken down. Transaction-based revenue, a little over $1.2 billion. Subscription and services based revenue, about $685 million. Hardware revenue: A lot of people are surprised to see this hardware is just a drop in the bucket. Less than $44 million of Square's revenue comes from selling the actual payment terminals and things like that, that you see in stores.

Their biggest revenue source by far, more than after the revenue is Bitcoin (BTC 1.52%) right now. That's to be expected. This revenue counts their entire Bitcoin volume. This means that about $2.7 billion worth of Bitcoin was bought by Cash App customers. That's not money in Square's pocket. So when you see them report a lot of numbers in their earnings release, and when I talk about a lot of these numbers on this page, I'm going to say them twice, once including Bitcoin and once without Bitcoin because it distorts some of the numbers. Bitcoin is 58% of Square's revenue. But if you break down the other three categories without Bitcoin, transaction-based revenue, this is like swipe fees from their payment volume, things like that. Any transaction-based revenue makes up 52% of the non-Bitcoin total. Subscription and services-based revenue makes up 29% of the total, and hardware is just under 2% of their non-Bitcoin total revenue. Hardware is not only a very small part of the business, but when you go down to the next section where it says cost of revenue, you will see that the hardware is actually an unprofitable revenue source. They made about $44 million in hardware revenue. It cost them over $61 million to make that hardware, and the reason is, it's because that hardware is what generates the $1.2 billion worth of transaction-based revenue. They're more than willing to take a hit on that. Just a couple of other things I wanted to point out here.

Brian Withers: Matt, before you leave that and I know talking to my brother-in-law, he doesn't pay any subscription fees to Square for any of the services that he gets or for any of the reports and whatnot. He explained to me that he just pays the percentage fee for the transactions, and then there's a whole bunch that comes with that. He gets all sorts of reports, and he gets, certainly, customer service and things like that. I always think of, and I was just hoping you could tell me that I was thinking about this the right way, is that transaction-based revenue is something that everybody pays, and then for those customers that are larger and want more services, maybe like employee scheduling and things like that, that would be the subscription line so that I would think of being a high-end subscription services or the plus plan, or whatever, the premier plan.

Frankel: Yeah. Add-on services, I guess, is what you can call the subscription-based revenue. That's a really good point. Transaction-based revenue is when, for example, Square makes, I think, $0.10 or $0.12 off every swipe transaction through its seller ecosystem. That would be an example of transaction-based revenue. Square Capital generates a lot of the services-based revenue, is a good example of that. Two more things I wanted to point out. If you look at gross profit down here, Square's gross margin is 24% based on this gross profit number and this revenue number. That's not great for a tech company. But when you back out Bitcoin from the equation, Square's gross profit jumps from 24% to 63%. Bitcoin is not a high-profit business for it. That's not why Jack Dorsey has Bitcoin included on the Cash App. It's not because it's a high-margin business. Square might make 1 or 2% from a Bitcoin transaction, if that. Operating margin, which is bottom line, this is where the earnings and profitability comes from. Based on this operating income, 2.7% based on the total revenue. But if you just look at non-Bitcoin stuff, it's about 20%, big difference there. The key points that new investors should know about the income statement, if you want to see earnings per share, it's on the bottom. It's not consistently a profitable company. A $0.45 earnings per share for a company that's trading at $270 a share is not a gigantic profit margin, especially when you see that in previous periods, it hasn't really been very profitable. Those are the key points.

Matthew Frankel, CFP 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 Nearly 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 Stock Quote
Block
SQ
$67.77 (9.11%) $5.66
Bitcoin Stock Quote
Bitcoin
BTC
$17,113.86 (1.52%) $256.14

*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
349%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/01/2022.

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.