11/08/2020 Square: A Tech Company And A Bank (NYSE:SQ) | Seeking Alpha
Long Ideas | Tech
Square: A Tech Company And A Bank
Aug. 3, 2020 11:31 PM ET37 comments | 37 Likes by: Hidden Opportunities Summary
Despite having several services resembling that of a traditional banking institution, Square is not just another bank. The company has abilities to offer serious competition to existing banks.
Usage of cash in the US still remains high and Square's TAM is barely penetrated.
Companies across industry types, from Amazon to General Motors, have leveraged financing and lending to boost their sales, but that doesn't make them comparable to traditional banks.
In my opinion, Square will leverage the strength of its Cash App ecosystem, to boost seller experience through the Cash Boost program.
Growth potential for Square remains strong. Dips in the stock price represent long-term buying opportunities.
Square (SQ) has surged 10x since its IPO and is currently at all-time high levels. Yet, I believe there is a lot more where that came from, for long-term investors due to the strength in the seller ecosystem, the traction for the Cash App ecosystem and the growing adoption of cashless payments.
https://seekingalpha.com/article/4364019-square-tech-company-and-bank 1/20 11/08/2020 Square: A Tech Company And A Bank (NYSE:SQ) | Seeking Alpha Transformation of Payments
The terms and methods of payments have evolved greatly over the years, with increased convenience, lower fees and ease of use being the driving factors.
Image Source
The credit card terminal was introduced in 1979 by Visa (V), but even in 2003, more transactions were paid for by check than by any other method. One of the biggest reasons for that was that credit card payment acceptance was a challenge for many businesses.
Square (NYSE:SQ) was founded in 2009 to simplify this very problem for small businesses. In the last 10 years of its growth, the company has diversified into wide ranges of financial services to support businesses. We are currently in the era of digital payments and are moving towards a cashless society.
We now have electronic payment technologies like Square’s Cash App, Zelle, PayPal (PYPL), and Venmo (a subsidiary of PayPal) that are helpful for person-to-person payments (P2P payments). The adoption of these digital payment methods is still at its infancy and there are a lot more growth opportunities ahead. A Statista survey in early 2019 reveals that cash was still a popular choice in 2018-19, but I believe COVID-19 is providing a push for businesses to adopt cashless payments.
https://seekingalpha.com/article/4364019-square-tech-company-and-bank 2/20 11/08/2020 Square: A Tech Company And A Bank (NYSE:SQ) | Seeking Alpha
Why are companies increasingly becoming bank-like?
Small-business lending is an increasingly competitive area in fintech. PayPal has a program called Working Capital and provides loans to merchants based on sales history. Amazon (AMZN) also has a similar offering for sellers, and began extending credit to small business owners in 2011. Over the years, several Fintech players like Square, Robinhood, SoFi, etc. have applied for ways to become banks as doing so would give them better profit margins and the ability to diversify their product offerings.
Robinhood currently partners with Goldman Sachs (NYSE:GS), HSBC (NYSE:HSBC), Wells Fargo (WFC), Citibank (NYSE:C), Bank of Baroda (NSE: BANKBARODA) and U.S. Bancorp (USB) to offer checking/savings accounts. The idea is simple, if Robinhood can become your bank account, then you are more likely to execute trades exclusively on its platform.
Let us look at Amazon.
The eCommerce giant has financial services spanning across pretty much every domain as JPMorgan Chase & Co. (JPM).
https://seekingalpha.com/article/4364019-square-tech-company-and-bank 3/20 11/08/2020 Square: A Tech Company And A Bank (NYSE:SQ) | Seeking Alpha
Source: CBI Research
The idea is simple. If Amazon can get you lower-debt payments or give you a bank account, you’ll buy more stuff on Amazon. Same way, if Amazon can offer you a line of credit at low interest rates, then you will be able to buy more inventory to sell on Amazon.
Apple (AAPL) is one of the providers of a contactless payment solution in the form of Apple Pay and also issues Apple card in partnership with Goldman Sachs. The benefits to Apple are easy to visualize. The Apple card incentivizes customers to purchase Apple products by offering interest-free monthly installments.
https://seekingalpha.com/article/4364019-square-tech-company-and-bank 4/20 11/08/2020 Square: A Tech Company And A Bank (NYSE:SQ) | Seeking Alpha
Source
Further, Apple is able to obtain interchange revenue on all transactions, earn revenue through interests while continuing to accumulate additional end-user data to enhance the customized user experience.
Ant Financial, the banking arm of Chinese eCommerce giant, Alibaba (BABA), is the highest valued fintech company in the world.
General Motors’ (GM) sub-prime lending division - GM Financial accounted for 10% of the automobile manufacturer’s 2019 revenues. Several automotive companies have a financing arm, which constitutes a significant percentage of their revenues. Yet, we don’t value all these companies as we would a banking institution.
Source - General Motors 10K
By offering financing to customers, businesses can boost their sales, land larger contracts and increase their average sales transaction size. Financing allows customers to make regular, affordable payments toward the cost of a big-ticket item, instead of paying the full price upfront. Further, financing increases the company’s revenue generation as well, thereby creating a win-win situation for the company and its customers. https://seekingalpha.com/article/4364019-square-tech-company-and-bank 5/20 11/08/2020 Square: A Tech Company And A Bank (NYSE:SQ) | Seeking Alpha It is clear that there is a large segment of the population that isn’t well served by traditional banks. In my opinion, big tech could probably deliver these services better. Their platforms have reliable infrastructure and the data to help predict the services needed.
Earlier this year, Square received the nod by federal and state regulators to open a bank in Utah. The company will be able to use this opportunity to boost Square Capital to achieve increased flexibility in its small business lending program. That means Square will soon be able to originate commercial loans to merchants that process card transactions through its payments system.
Image source
Looking at the way Square ties its current product offerings together, it is clear that the company’s banking desires are to increase their relationship with customers (sellers). In 2019, Square put its Weebly acquisition to use by expanding its online store product and enabling sellers to set up their online store.
I believe every Square investor has seen the below image explaining Square’s two ecosystems.
https://seekingalpha.com/article/4364019-square-tech-company-and-bank 6/20 11/08/2020 Square: A Tech Company And A Bank (NYSE:SQ) | Seeking Alpha
Source
However, I believe there are several synergies in the two ecosystems, and think the customer centric Cash App is likely to feed into the buyer ecosystem.
Source: Modified by the author
Square’s Business Segments
Seller Ecosystem https://seekingalpha.com/article/4364019-square-tech-company-and-bank 7/20 11/08/2020 Square: A Tech Company And A Bank (NYSE:SQ) | Seeking Alpha Square combines software, hardware, and financial services to create products and services initially tailored for small businesses. Then, the company realized that small businesses may eventually grow out of them and wanted to prevent that from happening. Today, Square’s seller ecosystem bundles a wide range of services including:
Software Products and Services:
Square Point of Sale
Square Virtual Terminal
Square Appointments
Square for Retail
Square for Restaurants
Square Invoices
Square Online Store
Square Loyalty, Marketing, and Gift Cards
Square Dashboard
Square is currently rated as one of the best POS systems overall. In this segment, Square directly competes with eCommerce enabler Shopify (NYSE:SHOP) and Intuit’s (INTU) QuickBooks.
Image Source
Hardware
Magstripe reader
Contactless and chip reader
Square Stand
Square Register
https://seekingalpha.com/article/4364019-square-tech-company-and-bank 8/20 11/08/2020 Square: A Tech Company And A Bank (NYSE:SQ) | Seeking Alpha Square Terminal
Image Source
This space is quite competitive with many players, however, the important item to note is that Square’s hardware is the doorway for its suite of services.
Source
Financial Services
This is where Square highly resembles the functions of a bank.
Managed Payments
Instant Transfer
Square Card
Square Capital
Payroll
https://seekingalpha.com/article/4364019-square-tech-company-and-bank 9/20 11/08/2020 Square: A Tech Company And A Bank (NYSE:SQ) | Seeking Alpha Square attempts to provide a suite of services to small businesses, and competes directly with payroll giants such as ADP (NASDAQ:ADP) and Intuit QuickBooks.
Source: Author’s design
Cash App Ecosystem:
Storing, Sending, and Receiving Funds: There is no need for a traditional bank account anymore.
Spending: Interchange revenue through the use of Cash Card. Further, there is the Cash Boost program which offers discounts to certain businesses.
Investing: Customers can also use Cash App to invest their funds in US stocks and exchange-traded funds (ETFs) or buy and sell Bitcoin.
Source: Author’s design
However, due to the ability to invest and trade bitcoin, I would say Square’s Cash App also competes with platforms popular among the younger generation such as Webull and Robinhood.
https://seekingalpha.com/article/4364019-square-tech-company-and-bank 10/20 11/08/2020 Square: A Tech Company And A Bank (NYSE:SQ) | Seeking Alpha
Source: Author’s design
Even within Cash App, I believe Square attempts to consolidate the typical requirements of an individual and provide all services under one roof. Cash Boost concept is at its inception at present, but the way I see it, Square can provide discounts to Cash App customers for merchants within the Square ecosystem, thereby bringing sellers and buyers together.
Based on the description of services listed above, calling for Square to be valued as a bank is like asking to value Amazon as a bookstore during its initial years and Tesla (TSLA) with any other automobile manufacturer (I still have my doubts over the latter, but will go with the sentiment for now). Even if Square is considered a bank, in my opinion, it has significant competitive advantages compared with traditional banks.
Financials and Valuation
Looking at revenue growth, Shopify leads the pack with a CAGR of 67% since 2015, followed by Square at 39%.
https://seekingalpha.com/article/4364019-square-tech-company-and-bank 11/20 11/08/2020 Square: A Tech Company And A Bank (NYSE:SQ) | Seeking Alpha
Data Source: WSJ
Data Source: WSJ
Square trades at a slightly lower P/S multiple compared to PayPal and Intuit despite having higher growth. I agree that 10x sales isn’t cheap, but considering the TAM for its ecosystems, it could be justified.
In the article by Louis Stevens , Cash App is noted to be gaining traction faster than its rivals during this pandemic. Square’s banking license approval and the growing traction in Cash App puts Square as a leading contender in the digital banking space. The addressable market is huge in both Seller and Cash App ecosystems and Square is barely getting started.
https://seekingalpha.com/article/4364019-square-tech-company-and-bank 12/20 11/08/2020 Square: A Tech Company And A Bank (NYSE:SQ) | Seeking Alpha Source
Pandemic Performance
Square reported a 44% YoY revenue growth in the first quarter.
Since restaurants and stores were closed during the first quarter, it wasn’t surprising that GPV was down. However, Square’s card-not-present offerings, such as Virtual Terminal, Invoices, and eCommerce API, were less affected, and the company reported to have seen an acceleration in GPV from eGift Cards and Square Online Store compared to the rest of the first quarter. Since businesses began slowly opening up since June, I expect the second quarter and the rest of the year to show growth in GPV.
Further, during the month of April, the company saw record direct deposits in Cash App, revealing that a large number of users received their CARES Act stimulus payment. This indicates ease of use and flexibility in using the platform.
Source
Risks
While the Paycheck Protection Program loans are likely to keep several businesses afloat, the coronavirus is expected to permanently shut millions of small businesses in the next several months. This could significantly affect Square’s seller ecosystem customer base.
This may affect Square’s revenues in the near term, and probably drive the stock price lower, giving more buying opportunities for long-term investors. https://seekingalpha.com/article/4364019-square-tech-company-and-bank 13/20 11/08/2020 Square: A Tech Company And A Bank (NYSE:SQ) | Seeking Alpha The actual damage done by COVID-19 to the economy is still unclear. Yet, I am confident that the pandemic has nothing but accelerated the adoption of cashless payments and increased the purpose and meaning behind the company’s offerings. One of the most profound trends we have seen is the move away from cash payments towards electronic, ‘cashless’ payment methods. In my opinion, the biggest victim of the pandemic will be physical money.
Conclusion
In my opinion, Square will continue boosting its Seller and Cash App ecosystems with tuck-in acquisitions. The recent acquisition of Stitch Labs to boost seller operations management is just one among many to come.
Cash App could go into international money transfers like PayPal’s Xoom
Cash App could begin offering margin trading accounts on a subscription model
These are just examples of already existing services. Founder/CEO Jack Dorsey is a visionary and I am sure his team can come up with far bigger revolutions in global payments.
Image source https://seekingalpha.com/article/4364019-square-tech-company-and-bank 14/20 11/08/2020 Square: A Tech Company And A Bank (NYSE:SQ) | Seeking Alpha day xxx!, Chaos at 1455 Market , Part 4 is currently untitled, looking forward to the peoples comments on the first three, to title that last closing part of the series ! Thanks for reading this far ATS-Denver
05 Aug 2020, 05:37 PM
Galileo2you Congrats SQ Investors!
05 Aug 2020, 09:33 AM
MooneyMooney Marketplace Stock is already at 150. How high will it go in 3-5 years? I bought 100 stocks at 80. Should I add more of SQ or buy some other stock like $LVGO $TDOC $TWLO
Every one of these is at record high.
04 Aug 2020, 11:10 PM
shariftanzim Premium You just nailed it!!!
04 Aug 2020, 09:52 PM
gnewmie23 Marketplace Long SQ, cost basis is $63. Will hold and accumulate additional shares for 7-8 years (my planned retirement)
04 Aug 2020, 09:15 PM
Uncle Chocolate SQ earnings were just leaked. Looks like they crushed it. So much for buying the dip....
04 Aug 2020, 08:31 PM
Galileo2you Wow, marvelous well written analyzed researched article and very spot on!
Thank you!
04 Aug 2020, 05:10 PM
Nothanksb Premium @ianbezek read this
04 Aug 2020, 11:12 AM
HardytheTrader PRO Usually I buy stocks with both strong fundamentals and momentum, but $SQ is an exemption. Started buying as a contrarian trade in January at high $50s added two times during COVID-19 at low $50s high $40s. I believe the https://seekingalpha.com/article/4364019-square-tech-company-and-bank 16/20 11/08/2020 Square: A Tech Company And A Bank (NYSE:SQ) | Seeking Alpha Also, Square is currently only available in the US, Canada, UK, Japan and Australia. There is a whole world of opportunities to expand.
Square may very well be a bank from a regulatory standpoint, but it surely is much bigger than your traditional bank. I see seller and Cash App ecosystems growing strongly in the next 5 years, with adoption fueled by the need to go cashless. I recommend Square to long-term investors.
Disclosure: I am/we are long SQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (37)
Monkeybrainsfriend1 Premium You need to double check your facts. SQ is not a bank yet, JD would like everybody to think so however. They have been approved for a 2021 start and even then maybe, An additional 40% capital is needed for reserve than a standard bank and they need to clean up the books and settle the lawsuits filed against them in the San Francisco courts,
SQ is a partner with Celtic a Industrial bank (Ib) in Utah and uses them on all their loan, past-PPP deals. They use Sutton Bank in Ohio to distribute their credit cards both Cash App and the Merchant Square business debit card. Check out Sutton's web site and see the please leave us alone if your a SQ Cash App client. They issue thousands of other prepaid cards for other consumers and have minor issues compared to SQ, the written is on the wall..
Their is a strong case to SQ as having 1.35 million accounts being deactivated and holding funds in excess of 300M in a "reserve account" this number also includes the merchants that Dorsey put on his custom 30% (Covid- 19, 'its for your protection and ours") of your gross sales as they go into a "special reserve" account to be released in 120 days, What an accounting nightmare 120 days back here is your 30%,and today's 70%, and then its on the slow boat to your bank to really screw up your records.. your kidding right? and that deactivated money I spoke about.. that is to be released in 90 days. There are numerous merchants that are into day 200 and going, without any communication as SQ has no consumer customer service..just check out the BBB in San Francisco www.bbb.org/us/ca/san-francisco/profile/credit-card-merchant-services-inc-1116-370609 , Sutton Bank, www.suttonbank.com/services-tool/tools/prepaid-card-support.html , currently writing my first Seeking Alpha articles, a series of four all about SQ, The facts and fiction, You deactivated my account, where is my money its
https://seekingalpha.com/article/4364019-square-tech-company-and-bank 15/20 11/08/2020 Square: A Tech Company And A Bank (NYSE:SQ) | Seeking Alpha future is very bright for Square and its shareholders, despite the temporary weakness in the seller ecosystem. The stock may got a ahead of itself, but fundamentals will catch up eventually
Long SQ
04 Aug 2020, 08:12 AM
Adambombfx @Hidden Opportunities
You nailed SQ DEAD ON ! this is an amazing company that I see as still being a child in the payment space. Enourmous growth ahead for Square as it still has 90% of the globe to expand into. I have neen long since $37.65 for a long term hold and will remain long just like my AAPL.
Thank you for a very accurate article !
04 Aug 2020, 07:26 AM
Reddington crap, DCA. It never got to my < $30 target in March. I wanted to add to my position at $41.
05 Aug 2020, 08:25 AM
Crazy Alien I've waited so long for coinbase or robinhood to IPO and then this company shows up and I didn't realise until now... Great opportunity a lot of millenials betting on the stock market and crypto cash app will crush earnings
04 Aug 2020, 07:02 AM
r Negoro It's a bank with a little side gimmick actually. It's actually more to a bank that caters to those that arent qualified to be catered by a bank. It is a bit of visa, bank and wirecard, mixed in together. It's like alipay , i think.
04 Aug 2020, 05:15 AM
Bushy12 I got in at 129 and not looking back.
04 Aug 2020, 03:54 AM
Mick Research Regarding payments, how does it compare to Visa, Mastercard or Paypal?
04 Aug 2020, 02:15 AM
hksche2000 @author: covered it all and then some. Thanks! SQ squarely to the moon. Didn't know about their Bank opening in Utah, which adds another dimension. Agree though, major loss of SB is a real risk, even if there's an effective COVID vaccine/treatment in 2021.
SQ SH (since $37) in all accounts, hoping for more pull backs.
https://seekingalpha.com/article/4364019-square-tech-company-and-bank 17/20 11/08/2020 Square: A Tech Company And A Bank (NYSE:SQ) | Seeking Alpha
04 Aug 2020, 12:39 AM
virginiau Square is a GREAT company with miles of upside ahead. Stock should easily go to $150 in 6 months! Long SQ! :-)
04 Aug 2020, 12:20 AM
arewolfe It's trading at $151 right now in AH.
04 Aug 2020, 10:53 PM
MooneyMooney Marketplace It already 151 post market. So in 6 months it will be ...?
04 Aug 2020, 11:12 PM
FulcrumBTC Premium Good article but a little disapponted that there was No mention of Square Crypto or how easy/simple it is to own and custody Bitcoin? Cash App is digital wallet infrastructure to own many types of assets: dollars, stocks, Bitcoin, etc.
04 Aug 2020, 12:16 AM
webbsinferno Premium Marketplace What’s Squares moat compared to the other players?
04 Aug 2020, 12:12 AM
95012790 @webbsinferno Jack Dorsey
04 Aug 2020, 12:31 AM
NotAnInfluencer A relatively narrow moat. Mostly because they've developed a cost advantage over new entrants. There would be some switching costs for smaller merchants, which is another aspect of their growing moat. Their unique software and point of sale devices are also important.
04 Aug 2020, 12:46 AM
webbsinferno Premium Marketplace @95012790 lol good point
04 Aug 2020, 08:16 AM
webbsinferno Premium Marketplace https://seekingalpha.com/article/4364019-square-tech-company-and-bank 18/20 11/08/2020 p Square: A Tech Company And A Bank (NYSE:SQ) | Seeking Alpha @NotAnInfluencer Gotcha. Thanks for the insight!
04 Aug 2020, 08:18 AM
FulcrumBTC Premium Digital wallet infrastructure. You can be your own bank all from an app (checking account, p2p transfer, direct deposit), you can buy/sell stocks, you can buy/send/store Bitcoin
04 Aug 2020, 01:36 PM
Galileo2you Add business accounting services too with a strong ecosystem moat.
Do everything digital wallet for merchants & consumers alike.
04 Aug 2020, 05:21 PM
NotAnInfluencer @FulcrumBTC None of those things suggest a moat. Those are only conveniences to the customer. Competitive moats are very different.
05 Aug 2020, 01:12 AM
95012790 Jack Dorsey is the moat.
05 Aug 2020, 01:23 PM
NotAnInfluencer @95012790 You posted that once already. It wasn't true the first time either.
05 Aug 2020, 08:13 PM
canyon What's the moat? First mover, ecosystem, Cash App, sticky SaaS... need more, really?
06 Aug 2020, 12:21 PM
mdridzwanismail I got in at 126 n not looking back.
04 Aug 2020, 12:03 AM
Erin Snarkovich You invested your money in a company with a 500+ p/e and major competition. Just be clear on that.
04 Aug 2020, 03:41 AM
TNando @Erin Snarkovich what competition?
https://seekingalpha.com/article/4364019-square-tech-company-and-bank 19/20 11/08/2020 Square: A Tech Company And A Bank (NYSE:SQ) | Seeking Alpha
04 Aug 2020, 11:50 AM
gutcheck seems like stiff competition - some better ... is it a race to 0
03 Aug 2020, 11:44 PM
canyon A race to zero as in cost basis maybe... you don't get SQ we must guess.
06 Aug 2020, 12:20 PM
GoingLong123 This is THEEE premier Square ARTICLE. What a complete layout of this innovative company. Any article on Square is a winner from here. Good write and keep up the good work. Very long SQ , Today was great too, +3.81% Opened it 2 weeks ago @ $123 !!! (edited)
03 Aug 2020, 11:37 PM
https://seekingalpha.com/article/4364019-square-tech-company-and-bank 20/20