In Focus: Square to $250 Billion
Square (SQ) has been back in the news lately, and it's the news I've been waiting for.
I last discussed Square back in March after the company acquired a majority stake of Jay-Z's streaming service Tidal. The acquisition marked another step in Square's new direction. The company that I've long referred to as this generation's cash register machine was moving away from just being a cash register machine company and becoming a full fledged manager of brands.
Benzinga reported last December that Square CEO Jack Dorsey's vision was to have multiple businesses under one brand, and acquiring Tidal was a part of that vision. Since the acquisition, I've patiently waited for what would be next.
Over the past few weeks Dorsey has announced that Square would create a hardware crypto wallet and also create a decentralized finance platform.
Decentralized finance or DeFi allows consumers to use the blockchain to make traditional financial transactions instead of using a traditional centralized financial institution. Lending, borrowing, investing, and making payments can all be done through DeFi platforms. According to DeFi Pulse, there is over $2 billion currently locked into DeFi platforms.
In my last piece on Square and in other places I've discussed how the look of what we deem to be a financial institution is changing right before our eyes. Square is one of the companies spearheading the change, and it's not gone unnoticed.
Mizuho analyst Dan Dolev states that buying Square now is comparable to buying Morgan Stanley in 1871. In February Dolev put a price target of $380 per share on Square, behind the thought of Square's Cash App possibly becoming a neo-bank.
Companies like Square and PayPal continue to expand on their services. My thought is that before long they will begin to compete with traditional banks and financial institutions over general loans, car loans, and maybe even home loans.
Square to $500/Share
At a $250 billion valuation, that would give Square a greater valuation than Wells Fargo (WFC), Morgan Stanley (MS), Citigroup (C), American Express (AXP), and Goldman Sachs (GS), but still below Bank of America (BAC), PayPal (PYPL), Mastercard (MA), JP Morgan Chase (JPM), and Visa (V). But what's the catalyst for Square getting to plus $500 a share?
If you haven't realized it yet, Square is building an ecosystem. As investors we've seen how profitable ecosystems can be. Apple's iOS ecosystem has paid off nicely for the company, Google's ecosystem is the best in the world and has rewarded Google shareholder's handsomely.
An ecosystem that links a company's cash register to its own mini-banking platform the Cash App, and links Cash App users to company's using Square terminals. Adding a DeFi platform to the mix will only broaden and strengthen the ecosystem. From the Cash App, users can purchase cryptocurrencies, and through a DeFi app the Cash App users can use their crypto as collateral for a loan or loan their crypto to small businesses using Square terminals, and receive a higher interest rate than traditional banks are paying on loans. Also included in the ecosystem are Stitch Labs, Squares software management operation, and Weebly, the company's website building platform.
While the DeFi part of the equation could be months or years away, as is, the current business is in good, if not great shape. Revenue in 2020 doubled 2019's revenue, and the company also reported a profit on the year. Revenue for Q1 2021 was 266% greater than revenue in Q1 2020. Hardware revenue was up 39% year-over-year in Q1 2021, which points to the company's ability to still grab market share. The company's Cash App generated $4 billion of revenue and $495 million of gross profit, which marked an increase of 666% and 171% year-over-year, respectively. Dan Dolev believes Cash App could reach $30 billion in gross profits by 2031.
There's also room for super expansive growth. Currently card payment acceptance with the Square app is only available in the US, Canada, Japan, Australia, Republic of Ireland and the United Kingdom. China is the region that gets investors excited when U.S. based companies talk about penetrating foreign markets, but I don't see Square in China. However, I could see Square in a host of other countries and regions, which will allow the company to add small populations of users in each region to the ecosystem.
In mid April the stock made a double top and then began to slowly fade. At its current price of $237.52, the stock is trading slightly below its 20 day moving average. Its 200 day moving average sits at ~$220. I don't expect many people to jump on Square bandwagon, as many people don't understand the significance of the crypto wallet, the DeFi platform, and still don't see the ecosystem the company is building. For those reasons I could see the stock trading down to its 200 day moving average, which would be a great time to enter.
The last bounce off of the 200 day moving average came in mid May of this year, and that was at around $200 per share. The bounce of the 200 day moving average propelled the stock to a high of $254 per share, but then the momentum died and stock started to fade again. A stronger area to enter would be at the $200 level, and price level where the stock has found heavy buying in the past. After the Tidal acquisitions, investors not in love with the deal sold Square, but when the stock fell below $200 per share, investors saw a deal and quickly bought the stock back up. Who says Wall Street doesn't know value?
Brands, Brands, Brands, Ecosystem, Ecosystem, Ecosystem
Brands and ecosystem, there's big money in collecting the right brands and providing a good and useful ecosystem, and Square is attempting to do both. Amazon has become the digital version of Berkshire Hathaway, with Prime, AWS, Alexa, Fire, Kindle, and Twitch all under one umbrella. Google's ecosystem of G-Mail, Google Drive, Chrome, Google Docs, Google Maps, YouTube, and a host of other apps have locked customers into the Google ecosystem and have generally made life a little easier.
Square is the process of collecting brands and building an ecosystem. At the company's current $108 billion valuation, we're still in the early stages of something I believe is going to be very, very big.