Could Square be a millionaire maker stock?

One of the best times to invest in a business is the transition from total growth (a start-up where sales are the main driver of stock prices) to profitable growth (when the business begins to scale up to a more efficient scale. and the bottom line begins to grow). This is the part of the journey Square (NYSE: SQ) begins to meet.

Even though 2020 has been a difficult year for its merchant services business due to the pandemic, Square’s consumer Cash app is bearing fruit. Shares have risen nearly 250% so far in 2020, valuing Square at a market cap of around $ 94 billion. It may no longer be a small stock with the promise of life-changing returns, but it could add significant growth to investor portfolios over the next decade nonetheless.

A solid bet on a “normalized” economy

Historically, Square has been a digital payments and financial services company serving small and medium-sized businesses. The freezing of the economy in spring 2020 should have been a recipe for disaster for this segment, and stock prices did indeed briefly drop more than 50% in late February and early March due to health concerns. of the most vulnerable companies. in the rising economy.

But the stock came back with a vengeance. The ability of small businesses to quickly switch to online sales has been underestimated. While Square’s “seller ecosystem” segment has been far from perfect, it hasn’t been a total disaster either. In fact, Square itself is partly responsible for helping its customers keep up with the knocks and adapt to the new digital reality first that has been imposed on them.

YOY = year after year. Data source: Square.

Square’s return to growth in merchant services over the summer months was great news, and there’s plenty of room for an even bigger bounce here. As the economy recovers its balance, the myriad of businesses that rely on these payments and financial management tools are expected to recover – and bring the ‘seller ecosystem’ back into expansion mode. two-digit percentage.

The banker of the future?

While we wait for a rally at Square’s old business, there’s still a lot to love about Cash App. In fact, it is this segment that is responsible for Square’s overall revenue increase of 86% in the first nine months of 2020. Added the ability for users to trade stocks and Bitcoin has been a real differentiator for the mobile wallet. Bitcoin-related revenue has grown from $ 339 million in the first three quarters of 2019 to $ 2.82 billion in 2020.

Granted, this is a very low margin area for Square. All of that cryptocurrency income equated to gross profit of just $ 56 million so far this year. However, the addition of new features such as the ability to keep Bitcoin tokens in the same place as digital dollars has increased the number of people using the Cash app on a monthly basis for more than its basic peer-to-peer money movement capabilities. to-peer (like over 2.5 million people who transferred stock brokerage accounts to Cash App in Q3 2020). These customers used the app for an average of three to four transactions per month more than those who only used the money transfer feature, and this generated roughly the same amount in additional profit for Square. Excluding bitcoin, app Cash’s revenue and gross margin jumped 174% year-over-year in the third quarter alone to $ 435 million.

Cash App expansion efforts are consuming a lot of reserve funds at Square as the company tries to maximize user base – meaning both consumers and a growing number of businesses signing up to accept. Cash App – and the additional services it can offer through the mobile app. But despite the significant expenses and other disruptions caused by the pandemic, Square is already starting to achieve higher profitability. Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) was $ 181 million in Q3 2020 – a 38% increase over the same period in 2019, and a massive rebound of just $ 9 million and 98 million dollars in Q1 and Q2 2020, respectively.

Driving down bitcoin revenue, Q3 Adjusted EBITDA was good for a 13% profit margin. Not bad for a company that still emphasizes growth before net returns at this time. And as Square’s various initiatives start to pay off, those returns will only improve dramatically over time. This fintech company brings together all the tools to take on traditional banking institutions, but it bundles its services into a much more efficient operation through users’ smartphones.

In short, Square is a big business these days, but there is plenty of room for further improvement as merchants and consumers continue to flock to the platform. There is a clear path for this to become a much bigger business in a decade or two than it is now. Will buying a small position make you a millionaire someday? Probably not. But it could definitely help.