Square, Inc. (SQ) is a major player in the merchant services space and beyond.
Due to the leadership of Twitter CEO Jack Dorsey, and some very prominent point-of-sale products, Square has become a pretty familiar brand in the consumer world and among retail sellers.
Square Valuation: Long-Term Projections
So how much could Square be worth in the years to come?
One essential reading on this question comes from analysts at ARK Invest, a firm known for its groundbreaking innovation funds (ARKK, ARKQ, etc.) This analysis provides outlook and predictions for Square’s growth and value in the quarters ahead.
They posit that Square could be worth $375 per share by 2025. The company would do this, the author says, by retaining 19% of its base annually for five years.
This projection is also based on the assumption that Square can monetize 20% of its U.S. base, a goal that some feel the firm will reach handily, given its appeal. Overall, the company reports an expanding seller base with 75 million monthly active users and counting.
A more conservative discounted cash flow forecast analysis still projects a fair market value of $296 per share for SQ share price.
Analysts describing Square’s rise to prominence say that its network P2P systems give Square an advantage over some of the competing services used by traditional banks.
In general, it’s a quickly evolving financial world, where transaction facilitators like PayPal (PYPL) innovate alongside decentralized cryptocurrency platforms and point-of-sale technology continues to evolve. Square is a part of that in a big way.
Square Business Model
The Square, Inc. business model is a story of a firm committing to a popular need within a broad industry.
Square started out with its credit card readers attaching to a smartphone port. This fundamental innovation changed the way that small retailers and other shops processed customer payments.
It’s not hard to see how this small device revolutionized retail.
Prior to the ability to plug in a Square reader to a smartphone, merchants were required to source physical gear and specialized software for PCI compliant transactions. Those who could not tie the infrastructure to the point of sale, or didn’t have the budget for these systems, were out of luck.
Early use of Square’s card readers did generate some controversy over financial data security. However, after Dorsey and company addressed this issue, the popularity of the card readers grew.
Square also began to offer Square Stand, a point-of-sale system for Apple iPad — which itself became a familiar sight in stores. Merchants could use either a smartphone or a tablet, both ubiquitous consumer technologies, as ad hoc point-of-sale equipment.
That led to many more small purchases on Main Street, and easier transactions between individual card-carrying customers and mom-and-pop businesses without a lot of traditional PCI system tools.
Another part of Square’s business model that arose later was the use of technologies like Bluetooth technology and QR codes to continue to make transactions more portable and versatile for both parties.
Then, later, Square introduced its groundbreaking Cash App, available in smartphone app stores, and yet another new market was built.
Cash App and Bitcoin
Along with all of the interesting functionality in Square’s Cash App, there’s also the ability to buy and sell Bitcoin through the easy interface.
This feature caught the zeitgeist as many more Bitcoin on-ramps are continually being created on exchanges, through payment facilitators, and elsewhere.
After the company opened the app to Bitcoin purchases, millions of users started to purchase bits of the cryptocurrency via Square’s application.
Users testify that the Cash App is uniquely easy to use, with just a few clicks of a button required to become a new cryptocurrency holder.
On the other hand, Square Cash App only offers U.S. dollar and Bitcoin transactions, while many of the top exchanges allow users to trade in Ethereum, Litecoin, Dogecoin and other coins. So the Square Cash App is generally a good on-ramp for beginners who only want to trade Bitcoin.
There’s another caveat to purchasing Bitcoin with Square’s Cash App or anywhere else that doesn’t offer detailed cost basis tracking and tax assistance. That’s the IRS. Crypto holders must show cost basis and report their gains in annual tax filings.
Square’s Cash App will generate a 1099 form for tax accounting. That, however, is the limit of the company’s utility in helping users to track their capital gains.
Like most functional exchange facilitators of its kind, the Cash App Bitcoin system has limits, such as parameters for buying Bitcoin on the Cash App, where the minimum investment is 1000 Satoshis, a term for a tiny slice of an individual Bitcoin. Maximum daily amounts are priced at $7,500.
In addition to its Bitcoin functionality, Square’s Cash App works much like a traditional brokerage account in allowing users to buy and sell various stocks through its platform.
When users receive a payment, the money is added to their cash account balance. There is the option to keep money in the app’s cash account, or transfer to a linked bank account.
Why Merchants Love Square
Square’s basic fundamental product line has been very empowering to merchants.
Small merchants on a budget have the most to gain in general from point-of-sale equipment that is small, affordable, and extremely versatile for activities like pop-up retail or selling at community events.
By replacing gated PCI systems with Wi-Fi friendly alternatives, Square changed the landscape, and that’s a lot of what merchants love about the company’s products and services. Ease of use is a major fundamental pinnacle of Square’s success among its merchant base.
Merchants also see Square as continuing to stay on the cutting-edge of financial innovation. For example, the company’s Cash App is drawing a lot of attention from investors, and from existing merchant customers who may want to use the new opportunities that the app brings, especially some related to cryptocurrency, and others for existing Square merchants.
Square Bank Charter
In recent years, Square has been successful in setting up its own bank charter with Square Financial Services, to operate the first such U.S. industrial bank of its kind.
Backed by the FDIC, Square’s in-house bank allows the company to springboard its lending service and other elements of the business, and to offer more to the merchants who use its financial services.
In competing with payment programs like PayPal and other contenders, Square has a definite moat in the Utah-based Square Financial Services banking operation.
The bank complements Square’s original financial services perfectly – for instance, there is the greater ability to underwrite and originate loans, especially for merchants who have used Square for payment processing in the past.
Square has also branched out through strategic acquisitions like that of Credit Karma and other subsidiaries. In addition to working with big retail partners like Starbucks (SBUX) and Whole Foods, another feather in Square’s cap is an agreement with Victory Park Capital as a capital partner, with $1 billion in loans achieved as of 2016.
Square has also acquired a music streaming platform called Tidal, and a restaurant delivery service called Caviar.
Part of the ‘secret sauce’ of Square’s lending strategy is to use the data from existing merchant services to underwrite loans, often to those same merchants.
It’s a uniquely efficient way to inspect a borrower’s creditworthiness that allows Square to put less emphasis on traditional elements of credit rating and other research — elements that are hard and often costly to probe, and sometimes ultimately not fair to borrowers.
Square Capital can examine a borrower’s books a precise way. Researchers will use available data for processing volume, ratio of new and returning customers, and overall business growth. Square can also look at the number of chargebacks and other indicators that might have a bearing on future profit potential and by proxy, creditworthiness.
After applying and the processing of their loan applications, users can see corresponding rates, fees, and estimated repayment terms, and choose whether to accept a loan offer.
Square Financial Services
When the bank was unveiled in March of 2021, Square top brass made it clear they were expecting the platform to “be the primary provider of financing for Square sellers across the U.S.”
“Bringing banking capability in-house enables us to operate more nimbly, which will serve Square and our customers as we continue the work to create financial tools that serve the underserved,” said Amrita Ahuja, Square, Inc. CFO and Executive Chairwoman of the board of directors for Square Financial Services, in a press statement at the time.
Ultimately, the bank charter element is important because of how it dovetails with Square’s prior business model and the products and services it has always offered to customers.
The lending industry is big and diverse. Any sort of financial company or bank can offer loan products with existing capital. But only Square can tie its lending offers to proprietary in-house data that’s pretty granular about how merchants operate.
Anyone who’s familiar with traditional underwriting understands how this will streamline lending offers, and make them more accurate and effective, protecting the company’s bottom line while funding borrowers in a more agile way.
This, analysts say, will drive Square’s dominance of its market sector in future quarters.
Utility of Square Cash App
In general, Square’s Cash App is touted as a primary way to start making payments more quickly than would be possible with traditional bank credit card methods. In the move toward decentralized finance and frictionless transactions, Square’s Cash App is meant to operate with less human involvement than what is found in traditional verification requirements.
Using pieces of information like phone numbers or emails, as well as others, users can expedite all of the transactions they want to make.
Then there is a unique identifier called the cashtag.
A cashtag is between 1 and 20 characters, and can effectively represent some party on the Square Cash App platform. The idea is simple, but novel at the same time – in the age of usernames and passwords, it makes abundant sense that instead of using a traditional customer identifier like an email or telephone number, the cashtag allows for that unique identifier to be user-crafted and unique!
Notwithstanding concerns about people abusing other people’s cashtags, Square’s Cash App gets relatively high marks in terms of security. The application also offers fraud protection for unauthorized payments. If Square’s Cash App can verify an unauthorized transaction, users should get full reimbursement. That’s according to specific rules and regulations spelled out in user agreements.
Square’s Cash App and Progress in 2020
As this technology took hold, Square’s seller ecosystem brought in $28.8 billion in the third quarter of 2020, a 12% rise year-over-year.
The Cash App was credited for part of this performance. Revenue from the app rose nearly 600% year-over-year around the same time.
Analysts were looking at how Square’s Cash App was used to distribute stimulus payments, and how more users entered the ecosystem based on using a mobile app in lieu of traditional banking.
Billed as a one-stop shop for many financial needs, the company’s peer-to-peer model quickly took off.
Another appealing feature of the Square ecosystem is Square Payroll, which can integrate with QuickBooks online. There is an initial subscription fee, and an additional fee for each employee.
Analysts rated Square among top payroll alternatives this year, and flexible pricing allows for customization. Square Payroll also offers automatic time tracking, team management features, and no annual commitment required to start using the service.
Through Square Payroll, users can mail W-2s and 1099 NEC forms, automate payroll tax calculations, assist with tax filings and manage timecards.
Square Revenue Growth
One of the most attractive elements of Squares progress for investors is significant increasing revenue growth over past years.
Estimates from 2018 show under $1 billion of revenue in each of the four quarters, for a total of $3.2 billion over the year’s time.
In 2019, Square reported over $1 billion in revenue for three of the four quarters, with the first quarter totaling $959 million. The total annual revenue was $4.7 billion and change.
In 2020, the firm charted over $3 billion for each of the third and fourth quarters, and a total annual revenue of over $9.4 billion.
With just the first and second quarters reported in 2021, Square has already outpaced the entire annual figure from 2020. That shows that pandemic closures or pandemic openings, or anything else related to wider consumer trends, is not likely to slow down this freight train.
In fact, Square’s success is nearly unmatchable when it comes to revenue growth. Analysts are used to seeing unicorns expand, but the consistent increases, some doubling annual numbers, are very reassuring to investors.
If Square’s revenue over the past few years is a solid indicator of growth, square EPS tells a similar tale of expansion and solid, substantial progress.
The last reportable quarter for the second quarter of 2021 marks $0.66 per share, easily a three-year high and nearly double the $0.32 per share reported in the fourth quarter of 2020. For reference, the first quarter of 2021 saw $0.41 per share reported.
Looking back a couple of years, it’s interesting to see seasonality kick in as that EPS dipped slightly into negative territory in the first quarters of both 2020 and 2019, while successive 2019 quarters showed solid positive EPS above $0.20 per share.
Although the fourth quarter of 2018 marked only two cents per share, the value was still positive, and that number was $0.13 per share in the third quarter.
It’s no surprise that investors are expecting positive EPS in the quarters to come.
If the second quarter is any indicator, the 66-cent earnings-per-share reported beat consensus estimates by $0.35.
To get the full picture, it’s helpful to look at some of the top competitors for Square’s transaction-based revenue model.
One is the PayPal Here mobile app, with a flat processing rate of 2.7% on transactions. PayPal’s early adoption of payment technologies made it a household name that is a formidable opponent in this market.
Another competitor is Intuit’s QuickBooks payments app. This Palo Alto company is established in merchant services, and tried to acquire Credit Karma before losing out to Square. The overlap shows how these companies could compete in the future.
Not to be outdone, Shopify (SHOP), an e-commerce giant in Canada, operates its own mobile apps with subscription rates and has a pretty big reach with payroll services and more. Shopify reported revenue of $1.58 billion in 2019, which is an indicator of its presence in the industry.
For Android devices, there’s cloud-based Clover point-of-sale technology. Other competitors include payment processors like Stripe, and other companies most of us may not have heard of including Shopkeep, Lightspeed and the New Zealand operator Vend, with a variety of merchant plans.
Some analysts also identify companies like Adobe (ADBE) and Salesforce (CRM) as Square competitors in a broader sense. These are big names – for instance with CRM, Salesforce now has a market cap of $294 billion, and Adobe’s is $306 billion.
Salesforce revenue for the last year was $21.2 billion, and Adobe revenue was $12.8 billion.
Revenue and Earnings Projections
With Square scheduled to report third quarter numbers November 4, analysts are expecting robust revenue numbers and positive earnings-per-share.
The consensus estimate for revenue is $4.4 billion, which puts SQ on track to double its 2020 annual numbers.
The correlating estimate for EPS is $0.38 per share, for an increase of 11% year-over-year.
Factors in this projected growth include Square’s widening e-commerce ecosystem and hardware product lines, along with the integration of these products and services into point-of-sale trends.
There are also Square’s international efforts and expansion in France and Spain, which offer potential levers of real growth.
A large aspect of investor interest has to do with Square reaching beyond the American borders to operate in other countries.
Since a few years ago, this expansion has been ongoing. Users can now adopt Square processing operations in the U.S., Canada and the UK, as well as Australia, Japan, France and Ireland.
Additional expansion will depend on regulatory oversight and other factors, but Square is already aiming to move across the European Union with early pioneer projects in France and Spain.
All of this will contribute to projected growth in the future.
Square and the Blockchain
All of the above numbers notwithstanding, and along with Square’s history of real innovation in point-of-sale and beyond, investors really are focused on Square’s foray into the blockchain and related fintech sectors.
It’s not just a case of introducing Bitcoin operations for the Square Cash App. Analysts have paid attention to the fact that Square has invested $50 million in Bitcoin itself to build capital reserves. Although this is somewhat common now, it was still a rare thing at the time, with Microstrategy (MSTR) leading the charge.
In addition, Square isn’t just putting money into Bitcoin – that’s really only the tip of the iceberg when it comes to the company’s blockchain involvements.
In the last couple of years, Square has started its Square Crypto working group looking at various opportunities around the blockchain. Not content with this endeavor, though, Dorsey and company also introduced the COPA nonprofit, which is aimed at making cryptocurrency more of an open source technology sector.
As the company developed this project last year, spokespersons talked about how COPA could combat patent trolling and the locking up of innovation that can slow down the advent of new cryptocurrency functionality in the community.
Placing its own crypto patents in a new library, Square is inviting other big players to join the movement to make blockchain resources free and open.
If all that isn’t enough, there’s another big project reported over the last few quarters. It’s around the practice of Bitcoin mining, which seems to be having a pretty big impact on Bitcoin prices over the past year.
Compass Mining reports Square joined with a blockchain mining company, offering $5 million to create new solar mining operations.
Why is that important? After Elon Musk publicly questioned Bitcoin’s ecology, per-coin prices dropped precipitously, and involved groups started to scramble to make new green Bitcoin mining practices more of a feature in the landscape.
All of that helps to buttress Square’s reputation as a leader in blockchain technologies and related research.
Square’s Stock Price
An analysis of Square wouldn’t be complete without looking at the company’s stock price over the past few years.
Near the end of 2019, per-share value was still around $60. By the end of 2020, it was over $200 per share. Highs in 2021 were around $275 per share, and Square is only just slightly off of that now, with pretty stable numbers across the first half of this year.
It’s also critically important, when looking at projected growth for Square in the years to come, to think about cross-selling.
After all, the company has so many ancillary products and services. We’ve gone over many of them including the lending services, the banking services, the restaurant delivery service, payroll, and more. That’s in addition to evolving point-of-sale hardware and software systems.
But Square has kind of an interesting and strange track record when it comes to cross-selling.
What people are finding when they dig into the reality of the situation is that Square has been relatively passive in cross-selling. This can be both a disadvantage and an opportunity.
Analysts point out that although Square hasn’t been explicitly telling merchants to get other tools and services, in many cases, they don’t have to, because of Square’s existing positioning.
In other words, if a merchant already has one of Square’s services in play, that data is aggregating in a way that could benefit the company through either light cross-selling or the merchant’s own capacity to sign up proactively.
Thus, Square is well positioned to cross-sell and that should add to some of its success in future quarters.
Discounted Cash Flow Forecast
Another way to predict Square’s future movements and growth is to look at cash flow forecast models. For example, in a discounted cash flow model, after growing over 100% in 2021, revenue increases would average 12% in 2022 and 2023. The next year’s numbers would see 40% in revenue adjustments upward, and another 3.2% in 2025.
Over that five-year period, EBITDA as a percentage of revenue would fall between 5% and 10%.
Blending this model with what we know about earnings revenue and other metrics, we see the same kind of stable growth projection that Square is known for in a more intuitive sense with its products and services.
Whether solving its merchants’ pain points or pioneering in crypto, Square has a lot of irons in the fire. It’s rare to be able to be this equivocal about growth because of the company’s multiple advantages and deep moats, particularly in banking.
Investors can anticipate future numbers soon and in successive quarters to get a better picture of what’s going on with Square, but at the same time, the company’s growth trajectory is already somewhat clear.
Again, too, the company’s substantial involvement in blockchain operations is notable and a big part of how some investors see continued success. There is the feeling that blockchain is now here to stay, and that improving Bitcoin mining practices will further pump up that coin’s value as companies take on significant Bitcoin capital reserves.
We’ve gone over all of this in more detail, and these are some of the elements that make parties like ARK Invest bullish on Square to begin with. Pay attention to this stock as the market turns.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.