Square (NYSE: SQ) recently released another impressive quarterly report. Revenue increased 266% year-over-year, and gross profit increased 79%.
The popular peer-to-peer payment tool Cash App from fintech company was responsible for most of the first quarter's growth, which would appear to be good news.
However, Bitcoin has been responsible for the majority of Cash App’s growth. Does relying on Bitcoin for high growth put Square at risk? And what are its other growth opportunities?
Bitcoin and More
Square operates two separate businesses. The original is the merchant business, which provides technology solutions for small and medium-sized businesses. This ecosystem is attractive to small businesses needing an all-in-one financial solution.
However, this part of Square has not fared so well during the pandemic due to the large number of small business closures. Seller revenue increased only 19% in the first quarter, which actually reflects steady improvement: Over the last four quarters, seller revenue has increased only 3,2% compared to the previous 12-month period.
Square's other main business is Cash App, which provides personal finance solutions, such as peer-to-peer payments and its recently added cryptocurrency exchange feature.
Users can even combine these two functions by sending cryptocurrency to colleagues via the app, and the company is expanding this interactivity. "The intersection of peer-to-peer and Bitcoin drives network effects for both," CFO Amrita Ahuja said in the first-quarter earnings call.
Bitcoin Trading With Apps
Square has loaded Cash App with a lot of features, like a debit card and a loyalty program. But the real driver of growth lately has been Bitcoin trading.
How big a growth driver is Bitcoin? Cash App sales increased by a whopping 666% in the first quarter. Without Bitcoin, Cash App sales increased by 139%. Bitcoin revenue and gross profit grew elevenfold year-over-year.
For the entire company, total revenue increased 44% year over year without Bitcoin. This is still substantial, though far from the overall 266%.
Which is also very reassuring for private investors who want to invest in cryptocurrencies like Bitcoin using private platforms like Bitcoin Prime what is it, eg.
CEO Jack Dorsey is clearly bullish on Bitcoin's future, saying he sees its potential as a "native currency" for the internet. The company has purchased more than $200 million worth of the cryptocurrency in the last two quarters.
Where Is The Future?
Bitcoin could be the company's primary growth driver for the foreseeable future, and perhaps beyond. However, despite Bitcoin's phenomenal growth, it remains a small portion of total gross profit. In other words, while it's an excellent addition to growth metrics, its overall impact isn't as significant as it might seem.
Total gross profit in the first quarter increased 79% to $964 million, split evenly between merchant operations and Cash App. Bitcoin contributed $75 million, or less than a tenth of the total.
Square’s lightning-fast growth will fade if Bitcoin stops fueling it. But its other businesses are growing, too.
Gross payment volume (GPV) for midsize businesses increased 43% in the first quarter, double the growth rate of total seller GPV. This segment represents the greatest opportunity for Square's seller business.
The company's other significant growth opportunity is in international markets. Square launched products in Japan, the United Kingdom, and Australia in the first quarter.
Within the Cash App, Square is focusing on increasing funding accounts, as the greater the flow of funds, the more users engage with the app. Currently, users can fund their accounts by linking their bank accounts or receiving payments, and Square is working to simplify the process.
It also launched its own bank account offering. If it can convince Cash App users to switch their primary bank to Square, that should drive engagement, too.
And the stocks?
Square stock has had quite a run, rising more than 2.000% over the past five years. It typically trades at sky-high valuations and at Monday’s prices is trading for 130 times one-year forward earnings. The stock has been on a slide lately, and that trend continued after the company released its earnings report last week. Investors may want to reassess whether the stock commands that much of a premium. Longer term, however, Square has plenty of opportunity.
(the photo is by (Ryderwear UK)
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