Square: 3 Reasons To Buy

Sep. 14, 2020 9:47 AM ETBlock, Inc. (SQ)12 Comments
Trevor Jennewine profile picture
Trevor Jennewine
986 Followers

Summary

  • Square has created two strong ecosystems: the Seller Ecosystem and the Cash App Ecosystem.
  • These ecosystem are built around payments and commerce, and will benefit from the trend towards digitization in both of these markets.
  • While growth has slowed in some areas during the pandemic, Square's revenue growth accelerated in both Q1 and Q2'20.
  • Cash App monthly active users have grown 93% annually since 2016, reaching 30 million in Q2'20.
  • Square is a buy for longterm investors.

Investment Thesis

Square’s (NYSE:SQ) business is centered around commerce and payments, and given the trend towards digitization in both of these spaces, Square is positioned to capture value in coming years.

My investment thesis can be summarized as follows:

1. Square has created two strong ecosystems, both of which provide valuable services to buyers and sellers. These ecosystems are fortified by high switching costs and network effects.

2. Square's Seller Ecosystem and Cash App Ecosystem both have a large total addressable market, and the global shift towards e-commerce and digital payments will drive growth in coming years.

3. Discounting recent headwinds related to the pandemic, Square's business is expanding quickly, as is evidenced by the annualized 41% revenue growth since 2015.

Reason 1: Square's Ecosystems Engage Buyers And Sellers

Square has built two strong ecosystems: the Seller Ecosystem and the Cash App Ecosystem. The Seller Ecosystem provides an array of products and services that help democratize commerce, enabling merchants to run their business. While less robust, the Cash App Ecosystem provides a mobile wallet that allows individuals (and businesses) to send and receive P2P payments, in addition to other functionality.

Square Seller Ecosystems & Cash App EcosystemSource: Square Investor Update (March 2020)

While Square has numerous competitors, Square's ecosystems offer a more robust solution than any competitor's products. To truly appreciate this, it's necessary to discuss Square's product offering and the numerous ways in which they generate revenue.

Hardware:

Square sells point-of-sale hardware. This primarily includes the Square card reader ($49), Square Terminal ($299), and Square Register ($799).

Software:

In addition to the Square POS application, which is free, Square offers other applications through a SaaS business model. This includes Square Online Store, Square for Restaurants, Square for Retail, and Square Appointments.

Square Online Store allows merchants to easily set up an online storefront, helping them take

This article was written by

Trevor Jennewine profile picture
986 Followers
PharmD OSU/OHSU, BA Miami (Oxford) UniversityI am a growth-focused individual investor. I place equal focus on qualitative and quantitative research. One of my core beliefs is that the best way to generate market beating returns is to buy high quality companies and, provided the investment thesis remains intact, hold them for long periods of time.

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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