Fintech giant Square (NYSE:SQ) has had an incredible run. Over the past five years, Square has generated an amazing 2,300% return for investors, and has more than tripled in the past year alone.
However, one of our experts thinks there could be plenty of upside yet to come. In this Jan. 14 Fool Live video clip, Fool.com contributors Brian Withers and Matt Frankel, CFP, discuss why Square could be one of the most exciting stocks to watch in 2021.
Matt Frankel: Yeah, go ahead and let us know what you’re looking at.
Brian Withers: Sure. Square. I think hopefully most folks have heard of Square but if not, we’re going to do a little bit dive on what they do. They’ve had a tremendous run, but I think there’s a tremendous amount of growth still left for Square. Square is focused on two significant ecosystems. This one on the left, the seller ecosystem is where they got started. They had a little, I think they call it a dongle, the square-shaped device that’s stacked in the auxiliary jack of your mobile device and allowed people, sellers at free markets, small businesses, and whatever to take payments.
I talked to my wife’s brother who runs a gaming company and board games. He said that it was literally life-changing for him because, I’m sure a lot of our listeners probably don’t even know what I’m talking about. There were these tri-fold, or there was a couple of pieces of paper and they put your credit card down and crunch over it, and the number is raised and it would come up pressed through onto the paper. Then you would get this really lousy copy and then people would have to enter that stuff in some backroom computer somewhere. Probably FIS (NYSE: FIS) was managing the transactions way back then, but it changed it so they could immediately take payments and not have to have all these pieces of paper to enter.
My wife’s brother Kurt said he’d get home sometimes and some of these numbers weren’t valid anymore and he couldn’t collect the payment from the customers, so it just made his business so much easier and they’ve expanded the system. You look at their customer engagement tools, payroll, invoices, appointments, or even getting into the restaurant space where they have systems to take your orders in the restaurant that is easily flexible, unmanaged, and all kind of stuff, so a seller ecosystem around taking payments and managing small business.
Recently over the last couple of years, they’ve built this Cash App which started as a person-to-person payment, but also credit cards, direct deposit, you can now buy stocks as well as bitcoin. It shows you what these businesses have done over the past few years.
This is a gross profit look at it. Usually I’m used to looking at revenue, but because of the way Square manages their bitcoin, they actually buy bitcoin at market values and then sell it to their customers through the bitcoin app. Since they own it as an asset, that sale ends up being revenue. Last quarter they sold over $1.6 billion worth in bitcoin over their Cash App platform. It’s a very small gross profit over that; $1.6 billion, I think they made $32 million. It’s a small gross profit, but it gets customers into their Cash App who want to transact with bitcoin.
Rather than have the fluctuation of this crazy bitcoin number on the revenue top line, typically, we look at gross profit and I think this is a good way to look at this business as investors. You can see this green piece is this Cash App has dramatically almost 10-Xed in gross profit from 2017 to 2019, and we’ll look at some 2020 numbers here shortly.
The other piece is, the addressable market for these two businesses is just tremendous. For sellers is $100 billion and they’re less than 3% penetrated. For the Cash App business, they’re less than 2% penetrated, so just a massive business still left to go.
Why I’m excited about the business is, here’s the last few quarters, you can see Q3, 2019, this is the Cash App metrics. Again, looking at gross profit, and you can see that gross profit over the past five quarters more than tripled. You can see the revenue — 104, 115, it’s accelerating. The revenue and growth is accelerating with the Cash App.
Matt, you talked about difficult comps in the upcoming year, but they have a balanced business here. The seller ecosystem at once was $364 million in gross profit, which was 75% of the gross profit here. Now it’s almost about equal. The gross profit, this most recent quarter for the seller ecosystem is just about 57%. You can see the gross profit growth for the seller ecosystem is quite impacted by the coronavirus. In Q3 it slowed down and actually went negative in Q2 and it bumped up a little bit in Q3.
I expect that as businesses get on their feet and Square, they’ve done some product development to allow curbside pickup in online ordering, and many of their customers have adopted their e-commerce solution. Surprisingly, a lot of people don’t know that Square actually offers a Shopify (NYSE: SHOP) type e-commerce product that allows brick-and-mortar stores to get online. I suspect this business is going to pick up quite a bit in the coming year, even if this Cash App growth is going to be tough to match. But the seller ecosystem is incredibly strong and they have an incredibly deep product set. I want to show you one more chart. Just a little bit about the product set that they have.
Frankel: The online store, I think, came from their acquisition of Weebly.
Withers: Yes. You can see here across the ecosystem, managed payments, point of sale, terminals, services for software for setting appointments, retail, and then on the financial services, so a wide array of function as well as innovation going on across the business to continue to grow. So that’s why I’m excited about Square.
Frankel: I wonder if you knew but in February, we had Jim McKelvey, the co-founder of Square on the Industry Focus show. I mentioned that on our 11 o’clock show. That was actually the last thing I did before coronavirus. Really interesting story. He was an old friend of Jack Dorsey. They’ve been looking for something to do and Jim McKelvey, I’ll put this link in the chat a second, he was a glassblower and he was an artist.
Withers: [laughs] Yeah.
Frankel: Someone came into the store and wanted to buy this really expensive piece without her husband knowing. But she only had an American Express (NYSE: AXP) card, and he wasn’t set up to take that. He said, “If you have a Visa (NYSE: V), I could take these,” and she said, “No, my husband checks the Visa. I have the American Express.” So he lost the big sale. He said there has to be a better way for small businesses to accept credit cards. He whittled the original little square card reader out of a piece of plastic. He actually ended up winning a MoMA award, a Museum of Modern Art award for that, which you find really ironic because decades as an artist and glassblower and he wins for a little piece of plastic.
Frankel: But I’ve been a fan of Square for a long time like I told you before the show. I’ve been a shareholder since the very beginning. I think I bought three days after their IPO. So it’s been quite a ride. [laughs]
Withers: Yes, it’s been fantastic. I think I had bought it the end of 2017 when it doubled that year. But still, it’s my third or fourth largest position at this point.
Frankel: Yeah. I mean, when I bought it, I think it was one of my smallest positions and now it’s I think the largest in my portfolio. When I bought it, it was about $11 a share before it was cool to be a fan of Square. When it was just a little niche, like the little card reader in your plumber’s cellphone. That’s what people thought of it at the time.