The brick-and-mortar banks that have served as the foundation of our financial lives for centuries suddenly find themselves under attack. Fintech companies such as Square (SQ 0.10%) are creating new ways to move and manage our money.
The stock is a winner, up over 2,500% since its IPO in Nov. 2015, and Square now has a market cap of $110 billion. Can it become a $1 trillion stock by 2030? There are a few reasons it's possible.
The massive banking opportunity
The banking industry is the backbone of our economy with assets totaling roughly $18 trillion in the United States alone. The money that pays for goods and services flows endlessly between people and businesses.
Square's operation consists of two primary segments, the Seller ecosystem and the Cash App ecosystem. The former includes a mix of hardware and software that merchants use to operate their businesses. The latter is a platform that offers users a variety of financial products and services that let them save, spend, invest, and transfer their money.
Analysts expect Square to generate $19.1 billion in total revenue in 2021, a 101% increase over the prior year. That may sound like a lot at first, but in a multitrillion-dollar addressable market, there are still open waters for a company like Square to continue growing for years to come.
Building out Cash App
Cash App is the main reason why investors should be excited about the company, because it's this part of the business that's going after the massive banking industry. Square is steadily adding features, including:
- Peer-to-peer payments
- Spending via debit card
- Direct deposits
- Investing in stocks and cryptocurrency
- Tax preparation
- Buy now, pay later (BNPL) potentially on the way
Square recently announced its pending $29 billion all-stock acquisition of BNPL company Afterpay, which will bring 16 million customers into the Square ecosystem where it can cross-sell additional services. Afterpay is also bringing with it $506 million in gross profits, which grew 96% year over year.
The BNPL industry is quickly gaining steam as an alternative lending option to traditional credit cards. It's popular with young consumers for its transparency and flexibility, often with zero-interest loans over a handful of fixed installments. A research firm recently estimated the BNPL industry will grow to $20 billion by 2028, good for an annual growth rate of 22%.
The long game?
Let's try to put all of these pieces together. Square's steady expansion of Cash App has extended well beyond a simple way to send money between friends -- it has instead become a central financial "super app" that consumers turn to for more and more of their needs.
Imagine your paycheck is direct-deposited into your Cash App account. You have the flexibility to pay your buddy for that pizza from last night, pay your bills, buy your groceries, and put some money into investments, all within Cash App.
A large bank can spend between $1,500 and $2,000 to acquire a retail banking customer. A company like Square doesn't have the overhead and employees that a brick-and-mortar bank does, so it can acquire new users for less than $5, giving it a substantial advantage over legacy lenders.
Cash App reached 40 million monthly transacting users as of June 2021, growing fourfold over the past two years and before factoring in Afterpay's incoming user base.
The road to $1 trillion
Square has a market cap of $110 billion as of this writing, giving it a price-to-sales (P/S) ratio of 5.8 based on expected 2021 revenue of $19.1 billion. Based on that current multiple, Square would need to generate about $174 billion in annual revenue by 2030 in order to have a $1 trillion market cap. And to reach that top-line figure by the end of this decade, the company would have to average at least 28% annual revenue growth for the next nine years.
How likely is that to happen? Well, Square has grown its revenue at an average of 50% annually since 2015, but looking ahead, its progress will be lumpy at times. For example, analysts expect revenue growth in 2022 to slow to just 12% following a triple-digit jump in the current year.
That seems conservative given the company's momentum since the start of the pandemic, but even in a scenario where the 28% annual growth doesn't materialize, Square can still become a trillion-dollar stock -- eventually. Its growth roadmap remains wide open with Cash App expanding and the integration of new businesses such as Afterpay. As Square adds new features, it should generate more revenue per user. At the same time, Cash App still reigns as the No. 1 finance app on Apple and Google's app stores, and the company has a signficant international opportunity, so user growth can continue for some time. Even if the company grows revenue at a slower rate of 15% going forward, it would still clear the $174 billion revenue milestone needed for a $1 trillion market cap by 2036.
Keep in mind Square will grow its its revenue primarily by adding Cash App users and evolving the Cash App ecosystem, something it has a strong record of doing already. Investors should monitor user growth -- especially once the acquisition of Afterpay closes next year -- as the company builds the foundation it needs to become a global leader in finance.