Square: Out of the Box Financials

Initially, Square was just a credit card reader that attached to phones. Quickly, a hardware stand and app were added that turned an iPad into a point-of-sale system. Then Square really started to take off into new spaces. Simply, the business can be broken down into two separate ecosystems: Seller (Square) and Cash App. Square is evolving.

Seller

The Seller ecosystem is an all-in-one offering of hardware, software and financial services for small businesses. High level, the Seller ecosystem offers support to small businesses to help manage their business. While they initially started as primarily a point-of-sale solution, they have evolved to be much more than that. Seller is still the majority of Square’s revenue (adjusting out Cash App’s Bitcoin revenue). The Seller ecosystem does have big possibilities in an $85B industry, but revenue growth is slowing as competition is growing. Square is a smart, agile company that will continue to solve business problems. Huge total addressable market (TAM) plus a history of quick problem solving is a good combo.

Cash App

Cash App is a monster in the making. Initially, it was just an app to send and receive money (think Venmo), but it quickly became more than that. Cash App is democratizing financial services. It is a peer to peer ecosystem that allows users to deposit cash, spend via a cash card, buy stock or Bitcoin and much more. With Cash App, you can quickly handle your finances and investments. Cash App is not only abound with optionality, it has a proven track record of executing.

A new industry that Cash App is currently entering is payday loans. Payday loans are a scuzzy industry, but Cash App is trying to change that and provide loans at a much more reasonable rate. The examples I have seen are $200 loans at a 5% interest rate. I’m not sure if Cash App even makes money at these low rates, but I’m about it. It’s an experiment. Best case, it works and they wreck the payday loan industry. Worst case, it doesn’t and they just continue on with the next experiment. Low cost experimentation is how you build an empire – just another example of Cash App democratizing financials.

A huge portion of Cash App’s success depends on its’ customer acquisition cost (CAC). For Cash App to become the monster that I hope it will, it will require significant growth for a continued amount of time. I do think Cash App can do that with lower CAC driven by the virality of the product and strong brand. As cash app is first and foremost a peer-to-peer cash transfer app, users attract more users (i.e. “Can I Cash App you?”). Once Cash App reaches a critical mass, users grow the app via word of mouth.

Bigger Ambitions

Rumors of Square buying Tidal are revealing. Jack Dorsey (CEO) isn’t done building yet. He is trying to build Square into an empire like Disney (he was a former board member). Square is currently two ecosystems in one, so why not keep expanding? Given the track record and expanding userbase of the Cash App ecosystem, I’m not going to doubt Square in any low cost experiments they run (assuming Tidal is acquired at a reasonably cheap discount).

Bitcoin

Square is an extremely Bitcoin friendly company. Not only can you buy Bitcoin on Cash App, but Square also converted $50M of cash into Bitcoin on it’s balance sheet. In addition, Square has a department called Square Crypto where they are working on cutting edge applications of Bitcoin. Square Crypto even recently filed for a patent that would allow Cash App user to pay with crypto while vendors would receive their local currency. Shifting Bitcoin from an investment into a currency would be a huge step for crypto. Jack is truly crypto-friendly.

Other companies (PayPal) have recently started to embrace Bitcoin. They are years behind. Not only are they years behind, they also don’t truly understand Bitcoin. Right now they view it as a catalyst, while Square views it as the future. I think I know which one will win. Yes, it is the one who wrote a “My First Bitcoin” book.

Killer Branding

Square is a brand. Square makes this clear in their risks section of financial reporting, where the below risk is always at or near the top.

Just look at all the Cash App branding. In addition to the “My First Bitcoin” book, they also have a “My First Stock” book. They have an apparel line. They have a camo collection. Cash App has influencers. Even Square Crypto is brand driven.

It is weird to have so much branding on the Seller and Cash App ecosystems, and to me that reveals that Square isn’t done evolving. It makes even more sense with the news of the potential Tidal acquisition. Square is branding for who they want to be, not who they are. The branding for the Seller and Cash App ecosystems helps them, but it also shows that Square is so much more than just those two ecosystems.

Financials

Reviewing $SQ financials is difficult due to unique accounting practices that count any Bitcoin purchases in Cash App as revenue. This leads to inflated revenue figures and growth. Counting as revenue isn’t any concern, Square has smarter finance people than me and is audited. If both Square’s finance team and auditors think Bitcoin transactions should count as revenue, so be it. While $SQ is showing 139.6% YoY revenue growth, less Bitcoin growth reduces to 25.2% YoY. Gross profit doesn’t require Bitcoin adjustments (profit margins on Bitcoin transactions are ~2%). Given the pandemic’s impact on the Seller ecosystem, I think it’s extremely impressive growth.

The market echoes my feelings with the market cap approximately tripling in 2020. With a PE ratio of 280, the market has priced in significant growth expectations. Given the growth of Cash App, optionality and impressive track record, the valuation doesn’t scare me. All other financials check out. One thing to note is in early October, Square added $50M in Bitcoin to their balance sheet. That $50M investment is now worth greater than $150M.

Conclusion

Square is a company with a big valuation and bigger aspirations. They’ve proven they can enter new markets and win. The big valuation doesn’t scare me away given the proven optionality, blossoming brand and sizable aspirations. I don’t know what Square will look like in 5 years, but I trust it will be a whole new company (in a good way). Long $SQ.