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What's next for Square?

Yahoo Finance’s Brian Sozzi, Julie Hyman, Myles Udland, and Dan Roberts discuss Square’s 2020 growth with Mark Palmer, BTIG Managing Director and Financial Analyst.

Video Transcript

JULIE HYMAN: Well, Zoom may have been Yahoo Finance's company of the year, but there were a lot of contenders. One of them may have been Square. Those shares up about 250% year to date. Dan Roberts has been taking a look into that company's fortunes this year, which in part have been tied up with Bitcoin, of course, and in part have been tied up with the other services, its core services that it provides.

DAN ROBERTS: Yeah, Julie, it's interesting you mention that Zoom is our Company of the Year 2020. Square was our 2018 Company of the Year, and our own Rick Newman wrote an interesting post about a month ago about how normally-- in fact, every time we've announced a Company of the Year, except after Square, our choice for Company of the Year the next year vastly overperforms the market.


Square, in 2019, the year after we named it our 2018 Company of the Year, did not. It underperformed in the market. But now you have 2020, up 250%. Now, you mentioned Bitcoin, there are a number of Bitcoin highlights, and Square, along with PayPal, has been tied up closely linked to the big price surge for Bitcoin.

But I think more interesting, actually, is the story of Cash App's rise. Now, of course, the Bitcoin trading and Bitcoin options exist within Cash App, but the adoption of Cash App and the revenue from Cash App are up big in Q3, and then most interestingly, this is a company whose bread and butter core customer are small businesses, the kind of businesses that were hit extremely hard by the pandemic.

So in some ways, it's kind of counterintuitive that Square has had a great year, but really, it bounced back big in Q3. Q1 and Q2, of course, Square had a net loss, unsurprising, especially because some of those merchants that it services are brick and mortar merchants that were shut down in Q1 and Q2 because of the pandemic. So it had a loss in Q1, loss in Q2, Q3 back to profit, and Q3 it had that record Bitcoin revenue, its first quarter with more than a billion dollars in Bitcoin revenue.

You also saw a number of analysts upgrades flood in halfway through the pandemic, around June and July. Analysts saying that Square is poised to be a big winner in the next year or so because it's helping those small businesses digitize.

So first, its core customers were hammered by the pandemic, then Square was seen as a big winner along with, I would mention Shopify. And Shopify and Square have had exactly the same stock gains this year for the same reasons. The idea is that these businesses now, more than ever, because of the pandemic, are going to have to digitize and prioritize e-commerce, and Square helps them do that.

JULIE HYMAN: So let's talk about how much that is going to happen. I want to-- you're going to stick with us, Dan, and Mark Palmer is joining us now, BTIG managing director and financials analyst who looks at Square in his coverage.

So Mark, I want to focus in on that Cash App first of all, because it's had triple digit growth, as Dan was just talking about. What does that moderate to, or does it, going forward? And what could its eventual penetration be like?

MARK PALMER: Well, good morning. Good to talk to you. The Cash App story has been extraordinary. And a lot of that has been driven by unbanked and underbanked consumers who are using the Cash App to receive their government stimulus funds more quickly than they would if they had to wait a couple of weeks for a check. So that was really the impetus of the surge that we saw in Cash App this year. More recently, of course, with Bitcoin taking off, we saw that kick in, and that is driving many more users to the platform.

Now, where do we go from here? We do not anticipate moderation in the next couple of years. We think the Cash App user growth is going to continue to be 30% in 2021, 30% again in 2022. And one thing that should be kept in mind is that while PayPal is operating in over 200 countries, the Cash App is only available in the US and the UK. So the potential to bring the Cash App international is enormous.

DAN ROBERTS: Mark, Dan Roberts here. Thanks for coming back on. Let me ask you specifically about Square capital. I know that you have some thoughts on that part of the business, that Square's lending business. And as far as I understand, it's been around a few years, that still isn't a huge part of the business, and I know that you have some potential issues you foresee with that division at Square.

MARK PALMER: Well, our belief is that any time you introduce credit as an element into a Fintech story, it doesn't do good things for that stock's multiple. And frankly, we saw PayPal exit that business directly. They sold their lending arm to Synchrony Financial, they now have a flow agreement. So they can still offer credit, but the risk is actually being borne by Synchrony Financial.

In the case of Square, they're running in the other direction. And one of the things that I am hopeful of is that the bad experience that Square had earlier this year with Square capital, where it really did catch them back in the early weeks of the pandemic, was a learning experience, and that they'll take a more moderated view of credit and the extension of credit as a means of driving sales.

BRIAN SOZZI: Mark, Brian here. I'm very interested in what Square just did. That it spent $50 million to buy Credit Karma's tax business, Credit Karma now part of TurboTax join Inuit. Is this just a nice to have business for Square, or is it their next big transformational business?

MARK PALMER: Well, if you look at what Square has done, they have now gotten to the point where they are in-- throughout a consumer's financial life. So they are involved in spending, they're involved in saving. The next leg of that, as far as the Cash App is concerned, is tax. It's another element that's in everybody's life. And so we view this as just another means through which Square can attract more users to the Cash App.

Now, the timing is really interesting because we are about to get into tax refund season, and we believe that there are going to be a lot of folks who are attracted to Credit Karma tax, which again, is offered free. So what is the benefit of this to Square? Users. More and more users.

One thing, by the way, along those lines, Square right now has an estimated 35 million monthly average users. Since 2013 when the Cash App launched, 80 million people have used the Cash App. Square is going after the 55 million others who are not currently on the platform. That, in and of itself, is a source of significant upside if they execute on it.

DAN ROBERTS: Mark, as you mentioned, with Square, it's so much about all the different services the company provides. The ecosystem is the word they like to use. Cash App competes with Venmo, which is owned by Brain Tree, which is owned by PayPal. Now they're in the tax business. I'd love to get just an update from you, the short list of who are Square's biggest competitors these days? People talk about PayPal, but they also talk about Stripe, Shopify, and then the big traditional point of sale hardware makers as well.

MARK PALMER: Yeah, I think if you look at the point of sale, you have to think about FiServ, which through its first data acquisition, has Clover as a point of sale opportunity. So that's really who they're going up against. And frankly, the benefit that FiServ has is that it is closely working with the banks. So if you walk into a commercial bank these days, you may well see an ad posted for Clover.

With that said, the seller ecosystem has really been overwhelmed by what's going on in the Cash App side, and on the Cash App side, again, you're dealing with the likes of Venmo, the likes of Zelle, which is operated by the big bank consortium. Realistically, though, the Cash App has a use case, which is focused largely on the unbanked and underbanked. And that's, I think, part of the story that may be lost here, is the extent to which financial inclusion is really a part of this.

And the number of unbanked in the United States has been estimated as being as high as 80 million people who might need that use. As I mentioned before, the monthly average users for Square's Cash App are about 35 million. So there's a lot of room to run there. So that's where they really are competing well against the others.

Again, one of the keys here is you don't need a bank account. Some of the other operations, Zelle being a good example of it, you need to have a bank account.

JULIE HYMAN: Mark, just quickly, how big of a risk is the Bitcoin bet on the part of Square?

MARK PALMER: Well again, right now, Bitcoin is not a huge generator of gross profit for Square. It's really a means of customer acquisition, and a very inexpensive means of customer acquisition. Square notably did bring 50 million of Bitcoin into its own balance sheet as a Treasury asset. That's about 1% of their assets. So I think as a bet, Bitcoin is important with regard to the perception of Square, clearly there are investors who are buying Square shares as a means of playing Bitcoin without actually owning the currency. That's, I think, where there could be some risk, and you could see some correlation between the currency and Square stock.

But in terms of operations, again, it's really more about customer acquisition, which Square has done brilliantly in terms of bringing more and more users onto their platform very, very inexpensively.

JULIE HYMAN: All right, interesting stuff, Mark. Thank you so much. It will be interesting to see what Square does next year. BTIG managing director and financials analyst, Mark Palmer. Our own Dan Roberts as well. Thanks so much to you both.