Square (SQ 1.48%) generated a lot of buzz over the past month as it contemplated the development of a Bitcoin (BTC 0.48%) mining system while the cryptocurrency's price soared to all-time highs.
Meanwhile, Square's new partnership with ByteDance's TikTok highlighted its growth potential across social media platforms, while PayPal's (PYPL +1.22%) rumored interest in Pinterest (PINS 0.08%) sparked speculation about closer ties between Square and Twitter (TWTR +0.00%).
That's a lot of news to unpack, so let's review the key points and how they could impact Square's stock ahead of its earnings report on Nov. 4.
Image source: Getty Images.
Bitcoin's rally brings back the bulls
Square launched Bitcoin trades on its Cash App in early 2018. Its Bitcoin revenue skyrocketed 785% to $4.57 billion, or 48% of its top line, in 2020 as more people traded Bitcoin throughout the pandemic. That growth offset the pandemic-induced slowdown in its seller-oriented services.
In the first half of 2021, Square's Bitcoin revenue surged another 428% year-over-year to $6.24 billion, or 64% of its top line. It also retains Bitcoin on its balance sheet as a single-digit percentage of its cash and equivalents.
But Square's growing dependence on Bitcoin is a double-edged sword. It significantly boosts the company's revenue, but the Bitcoin trading business generates much lower-margin revenue than its seller services.
It also increases Square's overall exposure to Bitcoin's volatile prices. Fortunately for Square, Bitcoin's price recovered from China's crackdown on cryptocurrencies earlier this year and recently hit all-time highs.
Source: YCharts
Square considers building a Bitcoin mining system
On Oct. 16, Square CEO Jack Dorsey discussed the possibility of building an open-source Bitcoin mining platform in a Twitter thread.
Today, most Bitcoins are mined commercially with powerful ASIC miners manufactured by the Chinese company Bitmain. It generally isn't cost efficient to mine Bitcoins with less powerful machines.
Dorsey believes it's possible to build comparable Bitcoin mining machines with custom chips, then share those designs with individuals and businesses around the world. Dorsey hasn't provided any clear plans for such a system yet, but noted that Jesse Dorogusker, Square's hardware chief, would "start the deep technical investigation" into the potential project.
If Square actually builds its own mining platform, it could start mining more Bitcoins on its own like Marathon Digital or Riot Blockchain. Adding those mined Bitcoins to its existing holdings could strengthen its balance sheet, but building the mining infrastructure on its own could also be a very capital-intensive task.
Could Dorsey merge Square with Twitter?
In late September, Square integrated its online payments into TikTok. That partnership highlighted TikTok's growth potential as a "social commerce" platform, and followed a similar deal between Shopify (SHOP +0.15%) and TikTok in August. Shopify also secured other e-commerce partnerships with Pinterest, Twitter, and Facebook for online payments.
On Oct. 20, Pinterest's stock soared amid reports that PayPal, in an apparent reaction to Square and Shopify's latest moves, was interested in buying the virtual pinboard network for approximately $45 billion.
PayPal recently denied those rumors, but it could generate fresh interest in a potential merger between Square and Twitter again. Dorsey already leads both companies, and Twitter has also started to dabble in Bitcoin with its new tipping features. Tidal, the tiny streaming music platform Square purchased earlier this year, could also be smoothly integrated into Twitter.
Twitter hasn't shown much potential as an e-commerce platform yet, but tying Square's merchants to the microblogger's social network -- then merging Twitter's 206 million monetizable DAUs (daily active users) with Square's Cash App's base of over 70 million annual active transacting users -- could reboot those efforts.
Do any of these developments change anything?
All these recent developments have made Square a hot topic among investors, but only Bitcoin's rising price will likely affect its business.
Dorsey's interest in an open-source Bitcoin mining system is worth following, but it won't bear fruit anytime soon. PayPal's interest in Pinterest indicates the fintech and social media markets are overlapping, but it doesn't necessarily mean Dorsey will push Square to merge with Twitter.
So for now, most of these developments are just noise and speculation. For the moment, investors should focus on Square's expansion of its Cash App and the stabilization of its seller ecosystem in a post-pandemic market instead.
