Square’s Future Needs to Take Shape
Without the tailwind of stimulus checks, Square has to see some of its longer-term moves start to pay off
Square’s area greatly expanded during the depths of the pandemic. Now it needs to fill in that space.
A boom driven in part by people depositing and spending stimulus checks helped grow Square’s consumer Cash App to a huge base of about 40 million monthly transacting active customers by the middle of this year. That phase looks to be ending: While third-quarter customer balances in Cash App were still more than double what they were a year ago, they declined sequentially from the second quarter, as special government disbursements in the U.S. mostly ended.
That second-to-third quarter stall tracks with many payment companies’ volume-growth trends. So now questions across the sector are being asked about what could cause growth to reaccelerate, such as how quickly cross-border travel will return. For Square, many of those questions may be centered around resetting expectations for the consumer Cash App side of its business.
Square’s seller business, providing services to merchants like accepting digital payments, continued in the third quarter to grow at roughly the same longer-term rate, with a 29% two-year compound annual growth rate in gross profit. But the consumer Cash App’s explosion is slowing, with a two-year compound annual growth rate for gross profit of 104% in the third quarter, slowing from 128% growth in the second quarter.
That is, of course, still rapid growth. But Square’s stock already more than tripled in 2020, so high expectations are baked in. So far this year it is up just 14%. To take another leap forward, investors may need to feel like they have a firmer grasp on what can power continued hypergrowth.
Now, attention is turning to engaging and monetizing Square’s new, bigger audience. Some of that will be done by getting them hooked on Square’s neobank-like products. For example, active users of the debit Cash Card were key drivers of inflows into the app, the company said. Each month in the third quarter they added about 70% more to their accounts than other Cash App users.
With the Afterpay deal still in process, Square hasn’t yet fully laid out its vision for the acquisition. But bringing the split-payment service to Cash App users is surely part of the playbook. Square is even trying to deepen engagement within families, opening Cash App services to teens for things like allowances, first jobs and even designing a glow-in-the-dark Cash Card.
Square has used bitcoin as a hook, too. It has initiatives around hardware wallets, mining and decentralized applications. Others like Robinhood Markets HOOD -0.40% have seen a big bump from alternative digital tokens such as dogecoin. Square’s bet on bitcoin in particular is more concentrated, but may prove less volatile. Its bitcoin gross profit was down roughly 40% in the third quarter from its peak in the first quarter—versus a nearly 80% crypto transaction-based revenue decline for Robinhood from its second-quarter peak.
Like PayPal, PYPL -1.35% Square is also aiming to be a bigger part of the consumer’s shopping journey. For instance it is rolling out Cash App as a way to pay at Square’s sellers. Square is also trying to move up from the smaller merchants it has specialized in. The fastest volume growth in the third quarter was from its biggest sellers, those generating over half a million in annualized payment volume. They were Square’s biggest seller category by gross payment volume, surpassing micro merchants. Afterpay notably works with many big online retailers.
Bigger customers are definitely one way to fill a larger revenue box. To justify its stock price, Square is going to need a lot of that.