Square, Inc. — The Future of Banking, Commerce and Finance

Company Overview

Square, Inc. (Ticker Symbol — SQ) offers financial and marketing services through its comprehensive commerce ecosystem that helps sellers to start, run and grow their businesses.

Square combines sophisticated software with affordable hardware to provide sellers with a powerful payment and point-of-sale solutions such as hardware and software to accept payments, streamline operations and analyze business information.

Square’s payments and POS services include In-Person Payments, Online Payments, Square Cash, Square Register, Square Analytics, Square Appointments and Square App Marketplace. The company’s financial services include Square Capital and Square Payroll.

Reasons To Buy

  1. Square differentiates itself by offering a comprehensive commerce ecosystem enabling sellers to combine software, hardware and payments services from several vendors. The company’s managed payment solutions allow sellers to accept payment through a range of media such as magnetic stripe (a swipe), Near Field Communication (NFC), EMV (Europay, MasterCard, and Visa), online through Square Invoices, Square Virtual Terminal, or the seller’s website. Square’s powerful point-of-sale software and services help sellers manage locations, orders, inventory, employees, and payroll. It helps sellers grow their sales with customers, and gain access to business loans. The Square Capital service offers loans to sellers on the basis of their payment processing history. A technology-focused approach has enabled the company to develop products and services that are unified, fast, self-serve, and reliable and I expect this to continue in the coming years. I believe the company’s strong efforts toward expansion of its payment solutions portfolio will continue to drive its top-line growth and aid momentum in the growing market for online payment solutions.
  2. Square’s rate of growth has been impressive since it started operations eight years back. The company serves millions of sellers across various industries such as food, retail and services, and geographies including the U.S., Japan, Australia and Canada. It processed $106.2 billion of Gross Payment Volume (GPV) in 2019. The company has been doing well with larger and midmarket sellers. In first-quarter 2020, larger sellers contributed 52% to total GPV. The company’s robust product portfolio is the key catalyst behind its improving GPV. The Square Reader SDK is a major positive. Additionally, API Platforms, Build with Square, Virtual Terminal, Instant Deposit and especially Square for Restaurants will continue to drive the GPV growth further.
  3. The company is deeply focused on integration and automation. On the integration front, Square aims to make its services more cohesive. It focuses on integration with the customer directory to give sellers an advanced client base. It also helps to build customer profiles and provides purchasing history directly from the point of sale. On the automation front, Square is trying to make its services more self-serve. It focuses on machine learning to automate internal as well as customer-facing experiences.
  4. Square’s entry into the bitcoin market with CashApp product, is contributing well to the company’s quarterly results, Cash App also lets users buy stocks instantly, for free and at fractional amounts. That simplifies the investing process and gives users another incentive to use the app. Further, Square’s expanding global presence and its recent acquisition of the European P2P payments app “Verse” will continue to benefit its top-line growth. The introduction of CashApp and Instant Deposit in the U.K. bodes well for the company’s market position and it will continue to generate revenues.
  5. Square has a strong balance sheet. As of Mar 31, 2020, the company’s net cash amounted to $723.3 million compared with $600.7 million as of Dec 31, 2019. Further, debt-to-total capital was 49.3% as of Mar 31, 2020, which increased from 35.4% as of Dec 31, 2019. However, given the strong liquidity position, this is not a concern.

Reasons To Sell

  1. Growth will continue to depend on the company’s ability to differentiate. Square is vulnerable to intense competition and changing technology, industry standards and seller and buyer needs. Competition is tough as the likes of PayPal are encroaching on its turf. Also, increasing competition from Shopify remains a headwind. These call for frequent changes in product and service offerings, which in turn require heavy investments, putting pressure on its earning capacity.
  2. Moreover, the company is trading at a premium in terms of Price/Book (P/B). Square currently has a trailing 12-month P/B ratio of 29.46. This level compares unfavourably with what the industry witnessed in the last year. Additionally, the ratio is nearing the high end of the valuation range in this period. Consequently, the valuation looks slightly stretched from P/B perspective.

Earnings and Revenues

Square reported first-quarter 2020 adjusted loss of 2 cents per share. Notably, the company reported earnings of 11 cents and 23 cents in the year-ago quarter and prior quarter, respectively.

Accumulating reserves for transaction and loan losses owing to the expected impact from coronavirus pandemic on losses in future resulted in loss during the reported quarter.

Net revenues of $1.38 billion. This figure came ahead of the revised guided range of $1.30-$1.34 billion. The top line also improved 44% from the year-ago quarter and 5.1% sequentially.

The top line was driven by Seller ecosystem that contributed $853 million to net revenues, up 16% year over year. Further, robust performance of Cash App, which generated $528 million of net revenues, up 197% year over year, was a major positive. Furthermore, strengthening momentum across Bitcoin and strong adoption of Cash Card contributed to the results.

Additionally, continued acceleration in gross payment volume (GPV) aided the results.

Notably, the company completed the divestiture of Caviar to DoorDash at the end of October 2019. Caviar had been underperforming and consequently, its sale remains a major positive.

Excluding Caviar, net revenues would have exhibited a growth of 51% on a year-over-year basis.

Square has refrained from providing guidance for the ongoing quarter and the full year 2020. This can be attributed to the uncertainties related to COVID-19, which are expected to act as headwinds during the second quarter.

The company has put a temporary stop on subscription billings and waived subscription fees on software for sellers. This is likely to hurt subscription revenues in the second quarter.

Nevertheless, the growing adoption of contactless payment mode remains positive. Further, seller GPV from cardless transactions is expected to gain steam.

Additionally, growing momentum across peer-to-peer volumes, Cash Card spend, Cash Card orders, direct deposit transacting active customers and bitcoin volumes are likely to sustain revenues generated by Cash App.

Gross Payment Volume

GPV in the first quarter amounted to $25.7 billion. Notably, the figure improved 14% year over year on the back of the company’s continued momentum across the larger sellers.

Square defines larger sellers as those that make more than $125,000 of annualized GPV and mid-market sellers as those with annualized revenues of more than $500,000.

GPV from larger sellers contributed 52% to total GPV. This can be attributed to Square’s robust product portfolio and comprehensive ecosystem that aided it in attracting new sellers to its platform while retaining the existing ones.

Notably, the company witnessed a 29% year-over-year growth in GPV from January 2020 to February 2020 time period. However, the growth started slowing down since mid-March due to the rapidly spreading COVID-19 that impacted the seller business negatively.

Seller GPV declined 49% on a year-over-year basis in the last week of the first quarter.

Nevertheless, the strong performance of Square Online Store owing to coronavirus-induced growing transition rate of sellers to online commerce from in-person sales mode drove GPV growth.

Top-Line Details

Transaction (54.9% of net revenues): The company generated transaction revenues of $758.1 million, up 15.4% year over year. Strong payment volume contribution from existing and new sellers during the first two months of the reported quarter drove the category’s top line. The company witnessed softness in transaction revenues during the last two weeks of the first quarter owing to the coronavirus pandemic.

Subscription and services (21.4% of revenues): The company generated $296.2 million in revenues from this category, surging 34.9% from the year-ago quarter. This improvement can be attributed to the strong performance by Cash App, which contributed $222 million to the category’s top line. Further, solid momentum across seller subscription and services products remained positive. Additionally, Square Capital, which facilitated 75,000 loans worth $548 million, up 8% from the year-ago quarter, contributed to the results. However, the performance of Square Capital was also impacted by COVID-19.

Hardware (1.5% of revenues): Square generated revenues of $20.7 million from this business, up 13.5% year over year. The category’s top line was primarily driven by robust Square Terminal. However, COVID-19 hurt hardware unit sales.

Bitcoin (22.2% of revenues): The company generated revenues of $306.1 million from this category, up a whopping 367.1% on a year-over-year basis. Square continued to benefit in the bitcoin space driven by the growing adoption of Cash App. Notably, without bitcoin revenues, Cash App revenues would have come in at $222 million. The company witnessed growth in the transacting active bitcoin customer base owing to fall in bitcoin prices.

Operating Details

Per management, gross profit grew 36% from the year-ago quarter to $538.5 million. As a percentage of net revenues, the figure came in 38.9%, contracting 240 basis points (bps) year over year. While Transaction, Subscription and services and Bitcoin generated profit, Hardware category reported a loss during the reported quarter.

Further, coronavirus pandemic remained a woe.

Adjusted EBITDA as a percentage of net revenues was 0.7%, contracting from 6.4% in the year-ago quarter.

Operating expenses came in $628.8 million, surging 50.1% from the prior-year quarter.

Product development expenses were $194.9 million, up 26% year over year.

General and administrative expenses were $129.5 million, up 27% from the prior-year quarter.

Further, sales and marketing costs were $194.5 million, up 45% year over year, due to the increase in Cash App peer-to-peer payment transfer and Cash Card issuances.

Balance Sheet

As of Mar 31, 2020, cash and cash equivalents balance was $1.96 billion, up from $1.05 billion as of Dec 31, 2019.

Short-term investments were $521.8 million in the reported quarter, down from $492.5 million in the previous quarter.

Long-term debt was $1.76 billion, increasing from $938.8 million in the previous quarter.


Square Investor Update 2019 Year End

Apart from Square’s disruption within the banking and commerce sectors, the CEO of Square — Jack Dorsey expects bitcoin to become the world’s “single currency” and through Square’s CashApp bitcoin can be used for simple everyday transactions. This is seen through Dorsey’s $2.5 million investment into Lightning Labs, a startup blockchain technology company which utilizes the lightning network for fast blockchain transactions.

The CashApp also provides an ecosystem of financial products and services to help individuals manage their money. While Cash App started with the single ability to send and receive money, it now provides an ecosystem of financial services that allows individuals to store, send, receive, spend, and invest their money. It can potentially be an “all in one” app taking over savings accounts, trading accounts, transfer of money worldwide and with the introduction of bitcoin a “store of value” edging away from traditional fiat currencies and low interest rates from banks.

Square Platform on top of this can serve as bank which can not only give loans to businesses, but to individuals as a mortgage. The practicality of machine learning and data analytics has already been implemented into the seller ecosystem, where they’re able to capture and analyze billions of transactions per year and automate risk assessment for more than 99.95% of all transactions. As a result of this, It is only a matter of time before their loan default rate drops to 0.05%, whilst serving more customers and helping them make better investments into their business.


Square is suffering from rising product development expenses and costs related to Cash Card issuances. Further, uncertainties related to the ongoing pandemic are headwinds. Accumulating reserves for transaction and loan losses owing to the expected impact from coronavirus pandemic on losses in future are overhangs. Further, the temporary stop on subscription billings and waived subscription fees on software for sellers do not bode well for Square’s subscription revenues. Nevertheless, the company’s robust seller ecosystem, which helps in strengthening the relationship with sellers, is a major positive. The company has created any ecosystem around a closed-loop model much like American Express, but has executed this much better with greater potential. Further, the growing adoption of Cash App in the bitcoin space is a tailwind. The stock has outperformed its industry on a year-to-date basis. However, rising competition from PayPal(Venmo) is a risk.

Referred Sources:

Square Q1 2020 Results, Square 2019 10-K, ARK Investment Management LLC and predictions made by the Author’s understanding of the company.


This report contains independent commentary to be used for informational purposes only. The analyst/author contributing to this report does not hold any shares of this stock at the time of writing. The analyst/author contributing to this report does not serve on the board of the company that issued this stock. Additionally, the analyst/author contributing to this report certify that the views expressed herein accurately reflect the analyst’s/author’s personal views as to the subject securities and issuers.

Thank you for reading this article. Please Like/Share if you have found this information to be valuable.



Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store
Sai Penukonda

Sai Penukonda


Hi, welcome. Here I write about investing and philosophy. Let me know if you have any requests.