Point-of-sale devices for merchants hardly seem the stuff of fame and fortune, but Square (NYSE:SQ) allowed small- and medium-sized businesses to operate on a more even playing field against their larger brethren.
Tech stocks of any stripe have largely done well in the six years since Square’s initial public offering on Nov. 19, 2015. The Nasdaq 100 Technology Sector index, for example, has quadrupled in value since then, compared to a 117% rise in the S&P 500. Yet Square investors have done even better, so let’s see how and why that happened.
Building business back better
Founded in 2009, Square has relied on its seller ecosystem as its vehicle for growth for over a decade. In that time it has added greater functionality and opportunity by offering analytics and even small business loans to help business customers succeed.
Yet larger merchants are also finding value in Square’s ecosystem as well. During the second quarter, 65% of seller gross payment volume (GPV), or the total dollar amount of all card payments processed by sellers using Square, derived from businesses with $125,000 or more in annualized GPV, a 10 percentage point increase from 2019.
In the third quarter, mid-market sellers accounted for 37% of the total $41.7 billion in GPV, up from 56% two years ago. That’s up from 28% just two years ago.
In fact, in the seven years prior to the upheaval created by the pandemic, GPV transactions on Square’s network grew by an annualized average of 49% from $6.5 billion to $106.2 billion.
Future building blocks
Square’s stock, however, has taken a hit in recent months from the threat cryptocurrencies might play in stealing business away. Shares are down 33% from their recent highs. Yet it is that very technology that is shaping where the company is now going.
As Square just revealed, the company is changing its corporate name from Square to Block. CEO Jack Dorsey just stepped down from his position as CEO of Twitter (NYSE:TWTR) to focus more of his attention on Square, which will allow his enthusiasm for crypto to assume a larger role.
While the new name nominally harkens to the building blocks of the company that brought it to its current preeminent position — Square, Cash App, and the Tidal music streaming service it acquired — it also clearly points to where Square is going in terms of blockchain technology.
Square was already involved with bitcoin trading through TBD54566975, its bitcoin-focused financial services segment, and had announced plans to build a decentralized bitcoin exchange. But along with changing the corporate name, Square announced that Square Crypto, a separate initiative of the company dedicated to advancing Bitcoin (CRYPTO:BTC), would be changing its name to Spiral.
There won’t be any organizational changes associated with the name change, and its POS business will still be called Square. But cryptocurrencies are now the overarching focus of the business.
Where does this leave investors?
Despite crypto playing a greater role, it’s still the other blocks in the business that matter more right now. Cash App, for example, Square’s fast-growing peer-to-peer digital payments system, has seen its monthly active user count more than quintuple in three years ending at the end of 2020, while generating $55 in gross profit per user. Importantly, it only costs Square $5 to attract each new user, and the company generated $2.4 billion of revenue in the third quarter, up 16% from last year. Cash App is a cash cow for the payments company, delivering $512 million in gross profit, a 33% improvement over the year-ago figure.
Square is also about to acquire the “buy now, pay later” platform Afterpay, which should create a virtuous circle between the entire Square ecosystem.
$750 invested in Square six years ago is worth this much now
So how much would investors have made if they had invested $750 in Square shares? The digital payments pioneer priced its IPO at $9 a share, which was actually a disappointment since it had been expected to go public between $11 and $13 per share. It ended up raising $243 million at the time, giving it a valuation of around $2.9 billion.
But a shareholder buying in at the time would be enjoying a 1,359% return on their investment, or over 10 times the return in the benchmark index for that same period. That $750 stake would be worth over $11,100 today, versus just $1,600 if the investor had put their money in an index fund.
Square certainly got a boost from the pandemic as people started their own businesses, but the fintech stock‘s discounted valuation today suggests there might not be a better time to buy its stock than now.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.