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3 Reasons This Growth Stock Could Be a Monster

By Neil Patel – Oct 20, 2021 at 8:01AM

Key Points

  • Square has been one of the best stocks to own, as its returns have crushed the broader market.
  • The fintech pioneer focuses intensely on its users, possesses a key competitive advantage, and still has a long growth runway.
  • Buying shares of Square will boost any investor's portfolio, adding exposure to the thriving digital payments space.

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If the future is anything like the past few years, then shareholders have plenty to be excited about.

Identifying companies to invest in that are benefiting from broad secular shifts is a smart strategy. Whether it's e-commerce, streaming entertainment, or cloud computing, investors have numerous trends to dig into when finding quality businesses to buy.

As a top fintech company that is pushing forward digital payments and the concept of a cashless society, Square's (SQ 0.51%) stock has skyrocketed more than 2,000% over the past five years. If you haven't bought shares yet, don't worry. Here are three reasons this growth stock is still a big winner.

Person paying with smartphone at a clothing boutique.

Image source: Getty Images.

1. User value proposition 

In my opinion, what makes a business truly exceptional depends on how much its products and services improve the lives of its user base. For Square, its value is strikingly clear. 

The company was founded on providing simple and elegant tools for small businesses to accept payments. Today, this has evolved into a full range of 30 different software, hardware, and financial services solutions to help its Seller Ecosystem customers manage their day-to-day operations. 

And Square's burgeoning Cash App ecosystem gives individual consumers not only a peer-to-peer payments tool, but also the ability to spend, set up direct deposits, and invest in stocks and Bitcoin. All of this is provided in an easy-to-use, consumer-friendly mobile app.  

Square identified a significant market need years ago and capitalized on it before anyone else. Even JPMorgan Chase CEO Jamie Dimon agrees. At his company's 2019 investor day, he mentioned that Square innovated where the large bank didn't, calling out the younger enterprise as a perfect example of a company doing things JPMorgan Chase should have done. 

Even when compared to its biggest direct competitor, PayPal, Square has a higher Net Promoter Score. This is a clear indication of user satisfaction. 

2. Network effect 

As the operator of a two-sided platform, Square benefits from a powerful competitive advantage known as a network effect. As the business attracts more individual accounts via Cash App -- which currently has 40 million monthly active users -- the offering immediately becomes more valuable to sellers who want to access a large potential customer base. The reverse is also true, where more merchant accounts, and a broad assortment of shopping options, bring on more Cash App customers. 

In the most recent quarter, the business processed $42.8 billion in gross payment volume (GPV), more than double that of Q2 2020. Cash App generated gross profit of $546 million in the three-month period, while Seller gross profit came in at $585 million. Both were up greater than 85% year over year. 

Square's success is predicated on driving higher levels of engagement on its platform. Over the past two years, inflows for active Cash App customers nearly doubled. And Square is increasingly attracting larger sellers, or those that accept more than $125,000 in annualized GPV. Being able to drive more activity from its growing user base is a sign of the network's increasing strength. 

3. Large expansion opportunity 

Management believes that the impressive growth of this fintech is far from over. Leadership highlights a $100 billion revenue opportunity on the seller side and a $60 billion one on the consumer side. The plan of attack is to continue bringing new products and services to different markets over time. 

The recently announced acquisition of buy now, pay later leader Afterpay certainly helps in this regard. Since Square's merchants generate 85% of their GPV in the U.S., Afterpay opens the global opportunity set. Not only does the Australian fintech operate primarily in e-commerce, but more than 50% of its platform's payment volume comes from outside the U.S. 

And Square's proven ability to integrate and strengthen the connection between the Cash App and Seller ecosystems is a major reason why it's been so successful. Just last month, the business announced Cash App Pay, a new feature that allows individuals to check out with their Cash App balances in-store or online directly with Sellers. The embedded optionality inherent in Square's business model to introduce upgrades and innovations is evident, and it will keep pushing the company to new heights. 

Thanks to significant value offered to users, a powerful network effect, and a still massive untapped global opportunity, Square has the makings of a monster stock. Adding this booming fintech to your portfolio could be a very smart decision. 

JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Neil Patel owns shares of Bitcoin and PayPal Holdings. The Motley Fool owns shares of and recommends AFTERPAY T FPO, Bitcoin, PayPal Holdings, and Square. 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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