Fintech giant Square (NYSE: SQ) has produced above-market returns for its investors as it has grown from a niche supplier of credit card hardware to a massive financial ecosystem. In this fool live Video clip, recorded on September 20, Fool.com contributors Matt Frankel, CFP and Jason Hall discuss Square’s growth potential.
Matt Frankel: It’s square; SQ and this is our number four (out of eight fintech stocks). Square was three for me, and the only reason it wasn’t higher was that I had a slightly negative list. I tried to list the pros and cons of these actions – it helps me determine my ranking and for Square I had few downsides.
First, I’ll just go through the numbers. Gross margin up 91% year over year. They are now generating over $ 1 billion in gross profit annually for the very first time. The Cash app has been absolutely phenomenal for them. Forty million active users of the Cash application. Remember a few years ago when people thought they weren’t going to be able to monetize the Cash app? Cash App revenue has grown 128% annualized over the past two years. It is quite impressive. Square is slightly profitable. They don’t prioritize profitability Pay Pal (NASDAQ: PYPL) is right now.
There’s still pretty much all of that growth pattern, but they’ve had a positive net profit over the past four quarters. They are trading at something like 200 times the profit, so I still don’t see them as a very profitable business. Gross payment volume, more than $ 42 billion; much less than PayPal. That puts Square at about a ninth the size of PayPal’s payment volume.
Perhaps most exciting to me, Square recently got its own banking charters. They launched Square Financial Services. Right now they only use this to rename their Square Capital or business loans, but they have so many long-term implications for the business that they can throw into personal loans, others specialized banking products that they were unable to do. point. Sarah Friar, then CFO of Square, said some time ago that Square basically wanted to do whatever their bank does for consumers. Square is on the verge of doing that, so there are still a lot of products or services in the pipeline.
Let’s talk for a second about the things I don’t like about Square, and I want to hear Jason’s thoughts on that. Remember what I alluded to earlier, the acquisition of Afterpay. I think paying $ 29 billion to get into buying now-paying later is a bit of a reach. They pay 10 times more than PayPal for its acquisition. Instead of trying to build anything organically, they just add that up. Today, Afterpay adds approximately $ 700 million in revenue to its ecosystem; so I get it, but it seems like a steep price to pay to add a financial service that I’m not fully convinced about yet.
Second, I must say that Jack Dorsey’s infatuation with Bitcoin (CRYPTO: BTC) is probably my least favorite part of Square as a stock, and I own stock of Square. Of Square’s $ 4.7 billion in revenue, in the last quarter, $ 2.7 billion was from Bitcoin. They own Bitcoin on their balance sheet. Much of their money is coming from Bitcoin right now. Jack Dorsey is really involved in developing different kinds of blockchain networks and applications, and things like that. I’m not a big fan of it, and it’s a highly regarded company.
If you include the stocks they issue for the acquisition of Afterpay, you’re currently approaching $ 150 billion in market capitalization. A big market cap for the company, I mentioned about a ninth the size of PayPal in terms of the volume of payments they make, I think the Cash app is the real value of the growth engine of the company. business at this point, but curious to see why Jason ranked him number five.
Jason Hall: A few different reasons. in fact I classified MasterCard (NYSE: MA) before that because I think at some point you start to think only about the risk of those concentrated bets. You mentioned the Reached (NASDAQ: UPST) to play.
I agree they buy a brand here as much as anything, with Mastercard they buy something that they can just integrate into their platform. I want to see Square doing the same, right now by buying a brand. It could work. It really could, but man, that’s a huge reach. I think the banking charter is both a wonderful opportunity for expansion and diversification, and it also creates a huge risk because being a bank and being a payments business are two really different things and the risks you deal with are very. different.
If they are good at it and if they have the right people who understand the loans and take the risks that are involved; if they choose to use that bank charter for this thing and I think they will end up doing it, that might be fine. It could also be a great way to destroy a large chunk of shareholder capital.
That, for me, I just think that right now the downside risks have probably increased over the last year due to the concentration of Bitcoin trading which generates a large part of the income, because this massive capital which is now invested in Afterpay, and because of the risks of the banking charter, because we know that Jack Dorsey is not afraid to take risks. That worries me. I am a shareholder and I do not sell. I am much more careful than a year ago.
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