Quick Summary

Square provides small businesses an easy solution for handling electronic payments. Square's core product is a mobile application and simple card-reading device that attaches to a mobile device, allowing it to be turned into an instant point-of-sale terminal, and accept a variety of electronic payments. The firm has since branched out with additional services, including: Cash App, peer-to-peer payment service with ancillary features such as stock investing and crypto-currency trading; Square Capital, a micro-lending service; and various software products including online store builders and expanded point-of-sale (POS) software solutions. 73% of revenues are from transaction fees, where Square takes a percentage cut of every transaction processed through the platform. 25% are from subscriptions and service fees to its various service offerings mentioned above. Finally, 2% of sales are from point-of-sale card swipe hardware rentals. Square is largely a domestic firm, with only 5% of revenues coming from outside the U.S.

Does The Company Have Recurring And/Or Rising Revenues?

YES. Square's growth has been robust, with a 3-year average annual revenue growth rate exceeding 40%. Square continues to see impressive growth across all of its verticals, with gross payment volume and transaction revenue growing at 25%, and services revenues (led by Cash App, now a $1 billion business with 24 million users) growing at over 70%. The market opportunity is enormous. Digital payment processing at large is is massive $60 billion dollar market, growing at nearly 10% annually, and Square has captured only about 1% of it. Peer-to-peer payments is another large sector, expected to reach over $600 billion in volume by 2023 (a growth rate of 23% annually), a small percentage of which is Square's opportunity. The firm has barely begun to expand internationally. On the recurring side, payment processing is a "toll booth" business, with customers paying Square numerous times a day to process payments. Additionally, services like Cash App and store website software are subscription-based, another recurring model. There is not much to complain about here, Square's revenue characteristics are outstanding.

Does The Company Have Durable Competitive Advantages?

SOMEWHAT. With many of its client's core business functions of payment acceptance, point-of-sale accounting, and even core store website infrastructure built with Square, this sets up a HIGH SWITCHING COSTS moat. It would be quite disruptive to switch to a competitor, and would only be undertaken if there was substantial cost or functionality advantage. On the downside, the small-to-micro size of Square's customer base make switching costs less of a barrier than for large, bureaucratic organizations, and the failure rate of these businesses is quite high (50% fail within 5 years). We don't believe Square has a NETWORK EFFECT moat with Cash App - there are larger peer-to-peer networks like PayPal Cash (300 million users) and Venmo (over 40 million users), as well as offerings from tech giants Apple, Google, and Facebook (just to name a few).

GreenDot Rating: 

We are bumping Square up to a GREEN (very attractive) rating, from its previous YELLOW. In the ensuing years, Square has continued to show the stickiness of its platform, while also very successfully expanding into new ancillary service offerings, like Cash App, that also give the firm the opportunity to build economically powerful networks. We also like the expansion into POS and online store builders, as these are sticky platforms that are paid for on a subscription basis. Square is slowly expanding into larger businesses with sales over $125,000 (now over half of revenues), and still has a large international opportunity. The revenue model has always been outstanding, fully recurring, and with plenty of market size potential to grow into. Well-positioned for the budding future of retail, Square looks like a solid investment option.