Mar 25 2020 - Square: 9 Key Takeaways From The Investor Day

Summary

Not surprisingly, Square cut its Q1 2020 guidance, but much less than most had anticipated.

The gross margins of Cash App have kept the company close to its goal.

The TAM of Square is 0B.

Square Capital is much stronger than a lot of investors think.

The stock is definitely much cheaper now.

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Introduction

On the day that I write this, March 24, Square (SQ) held its investor day. The company shared an update on Q1 2020 guidance and that information showed again that Cash App is the part of Square that will be the driver for growth for years to come.

1. Guidance cut, but less than expected

As everyone expected, Square revised its guidance for Q1. But the cut was a lot less than most pundits expected. Net revenue expectations were lowered from .34B-.36B to .30B-.34B or just 2.2% at the midpoint. EPS will be under the guidance just issued three weeks ago.

The main reason for the cut is, of course, a slowdown in gross processing volume for its Seller ecosystem. But the impact on the Cash App ecosystem gross profit was lower than for the Seller ecosystem. Here is what the statement of the company said on the Covid-19 impact:

While the beginning of March was relatively in-line with the company's expectations, over the trailing ten-day period Seller GPV has declined by approximately 25% year over year, with greater declines in recent days. This has offset relative strength in the Cash App ecosystem, where the impact on gross profit growth has been less pronounced.

Also as expected, Square withdrew its guidance for 2021.

2. Gross profits grew

In January and February, the Seller ecosystem gross profit grew by 32% YoY, which is a great achievement but that's nothing versus the Cash App gross profit growth of a whopping 118% YoY.

(All images come from the Investor Day presentation, unless otherwise stated)

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Combined, the company saw gross profits grow at 51% before the coronavirus came throwing a spanner in the works. These numbers really look very good and I even expect them to continue to thrive after Covid-19 has left the country.

3. The company has become profitable

Because of the growing gross margins, the company has become profitable. While net income was positive for the first time in 2019, the adjusted EBITDA has tripled in the last two years, from 9M to 7M.

38067716-15850946272226398.png

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4. The Sellers TAM is huge

Square now sees its TAM (total addressable market) at 0B, a combination of the seller ecosystem and Cash App:

38067716-15850948961926918.png

This is how the Sellers ecosystem's TAM is composed:

38067716-15850951129867496.png

The rest (B) comes from international current markets, future international expansion and the introduction of new products and applications.

Don't forget that Square is also the second biggest payroll processing software for SMBs (small and middle-sized businesses) and that is also included in the Seller ecosystem:

saupload_ELbZX7WWoAA4msW_thumb1.jpeg(Source)

I have already mentioned that connecting Square's two ecosystems would be the holy grail for the company. But maybe that's too theoretical and an example will show you what I mean. Square's payroll service could funnel employees to Cash App's stock trading capability to manage their 401(k). I have repeated in numerous articles and comments that I like companies with these kinds of options.

Square also wants to grow the Seller ecosystem by focusing more on the so-called mid-market. That consists of companies with a yearly revenue between M and 0M, which is a step up from SMBs:

38067716-15850960689441671.png

Don't forget that Square started in the micro market and was already able to scale up to SMBs. If Square can tap the middle market better, its share of the TAM would definitely go up. It stands at less than 3% right now for the Seller ecosystem. Square wants to continue to focus on bigger customers, but that trend has already started. Sellers with more than 0,000 in GPV (gross payment volume) have grown to half of the total GPV.38067716-15850967758561351.png

5. Cash App's TAM is huge too

For Cash App, Square sees a TAM of about B.

38067716-15850962426655915.png

Important here is to note that this is, as opposed to the Seller system, for the USA alone. And that huge number is also without the huge opportunities in new markets, which Square sees as something for the long term:

38067716-15850963732586758.png

At this moment, the company has only been able to capture less than 2% of the TAM.

6. Square Capital is much better than most think

Especially in these dire times, a lot of investors are afraid of Square Capital. It is seen as a weak link for Square. While the total capital in loans to SMBs has risen a lot, to .3B in 2019, the loss-rate on these loans has come down:

38067716-15850971960685847.png

The reason is that Square only selects candidates that use its POS (point-of-sale) system. And that gives Square Capital insight in which businesses are eligible for loans. After all, the company has all of your sales and transactions. Depending on this information, a decision is made if you can have a loan, how big and under which terms.

Square works with Celtic Bank and the money is funded by a wide range of large asset managers, 40 Act funds, bank subsidiaries, pension plans, and insurance vehicles.

That also means that even if the Loan Loss Rate would go up, which is likely in this environment, Square itself doesn't hold the bag. Besides that, Square Capital works on another basis than most loans. As a business owner, you pay back the loan under the form of a percentage of your transactions. That means that this will be a relief for SMBs who had to close because of Covid-19. No transactions, no principal and interest payment. These loans are also smaller sums with a short repayment term of 18 months. The average loan is paid back in 8 to 9 months.

7. The number of Cash App users keeps growing

Cash App keeps chalking impressive growth in the number of monthly transacting actives:

38067716-15850981969610677.png

Impressive is that daily transacting actives even grew stronger than the monthly transacting actives, at the speed of 80% YoY. This shows that for a lot of people Cash App is their primary source of financial actions. I think that the trading possibility, which was introduced in September of 2019, will also have advanced the daily transacting actives.

8. The monetization of Cash App users keeps improving

It's not just the number of transacting actives that keeps growing for Cash App. Square is also able to gain more and more revenue from these users, despite the high growth. You would expect that new users have a dampening effect on the average revenue per user, but the complete opposite is true:

38067716-15850987625601304.png

And I expect this number to go beyond the current . After all, only about half of Square's users are monetized, but the number keeps going up steadily:

38067716-1585098928046335.png

9. Forget about FUD

As I wrote in my last article, I have already added to my Square position, first at and then (see the comment section) at . The stock went up by 15.75% today to .31 (Tuesday, 25th) and another 1.92% post-market after this news was announced. I think investors were relieved that the guidance cut for Q1 was so small. That's the advantage of Square always being conservative in its estimates. But I don't know what the stock price will be when this comes out. Maybe Square is down 20% again, who can tell in this market?

So I'm not suggesting that Square stock price is out of the woods now. There's still a lot of FUD (fear, uncertainty and doubt) around the stock. We simply cannot know what the stock price will do, although there are certainly enough people who act as if they can.

At this moment, we still don't know what will happen and what the impact will be on the whole economy. Of course, Covid-19 will have a serious impact on Square, but that goes for about any company. Square has cut its Q1 guidance now, but very mildly. I expect a slew of companies that follow this example.

The strange thing is that people are now much more bearish than when the stock traded at . Yes, the stock might go down again. But I'm pretty confident that if you look back even at this price in a decade, you'll have a really good feeling about it. I often get the impression that there are more long-term investors in word than in deeds.

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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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