Fintech big Sq. (NYSE:SQ) launched its fourth quarter and full-year earnings on Tuesday, Feb. 23. The corporate, with its level of sale (POS) and Money App ecosystems, has gone by way of a wild 2020, nevertheless it got here out the opposite facet stronger than ever. Listed below are just a few the explanation why Sq.’s enterprise is doing so properly, and why traders ought to believe it will probably develop over the long run.
Money App and the Money Card
Sq.’s greatest development driver is the Money App, its cellular app targeted on serving the underbanked and providing peer-to-peer (P2P) funds, amongst different companies. On the finish of 2020, Money App had 36 million month-to-month energetic clients, up from 24 million in 2019 and solely three million in 2016. That’s spectacular consumer development for a personal finance product.
Gross revenue for Money App totaled $1.23 billion in 2020, up 168% 12 months over 12 months. One motive the cellular app is rising so shortly is the Money Card, a Visa debit card that helps customers deal with the app like a standard checking account. What makes the Money Card distinctive are its boosts, or money again options, which persuade customers to modify to the cardboard when making on a regular basis purchases. In its earnings letter, Sq. talked about that Money Card clients who utilized increase options paid with their playing cards two instances greater than typical cardholders. That is essential as a result of Money Card income relies on taking a small slice of each greenback spent with the product, so the extra instances a consumer pays with the Money Card, the extra income Sq. brings in.
The headline story from Sq.’s report was the corporate deciding so as to add $170 million of Bitcoin to its stability sheet, which is on prime of the $50 million it purchased in September of final 12 months. These Bitcoin property made up round 5% of the money, equivalents, and marketable securities Sq. had available as of Dec. 31.
Whereas I haven’t got any takes on whether or not this was a very good or unhealthy choice, I can speak about how Sq. is utilizing Bitcoin to develop its enterprise. Beginning just a few years in the past, Sq. let Money App customers purchase Bitcoin with one faucet of a button instantly from their telephones. This has labored wonders as a buyer acquisition instrument, and it has develop into a simple strategy to market worthwhile merchandise just like the Money Card and immediate deposit to clients. In reality, Bitcoin and different merchandise have made the Money App so interesting that on common, Sq. solely needed to spend $5 to accumulate a buyer in 2020. When you think about that Sq. generated $41 of gross revenue per Money App consumer within the fourth quarter, the potential profitability of this enterprise begins to take form.
One final word on Bitcoin and Sq.: For no matter motive, Sq. is required to e book all Bitcoin transfers as income, regardless that it’s primarily a zero-margin enterprise. Traders ought to virtually ignore income development totally when this firm, because it makes development look loads higher than it really is.
We won’t neglect the primary pillar of the Sq. ecosystem: sellers. Sq. sellers had a troublesome time in 2020 as a result of COVID-19 shutdowns and restrictions on in-person eating throughout the globe (many Sq. retailers are eating places). This led to numerous churn from POS and software program clients on account of bankruptcies, which hit Sq. onerous in the course of the spring and summer time.
Nonetheless, on account of speedy improvements and product launches, together with e-commerce and curbside pick-up software program options, Sq. was in a position to develop its card-not-present gross cost quantity (GPV) 26% within the fourth quarter of 2020, a giant contributor to this section rising income 5% 12 months over 12 months in the course of the quarter. Omnichannel and on-line transactions made up greater than half of Sq.’s GPV in the identical interval, they usually have grown as a share of GPV yearly since 2016.
Lots of people have a look at Sq. with its $100 billion market cap, excessive valuation multiples, and breath-taking prior stock performance solely to be scared away — myself included. However should you consider the Money App can really develop into the all-in-one private finance instrument for younger customers, and the vendor ecosystem could be a main omnichannel funds supplier, it could be price it to pay up for shares when you have a long-term mindset.
This text represents the opinion of the author, who could disagree with the “official” advice place of a Motley Idiot premium advisory service. We’re motley! Questioning an investing thesis — even one in every of our personal — helps us all suppose critically about investing and make choices that assist us develop into smarter, happier, and richer.