The digital payments app, Square (NYSE:SQ) has gained a lot of steam since the start of the pandemic with SQ stock rallying at an impressive 120% year to date.
A major tailwind for the company was its subsidiary Cash App, a consumer-facing digital payment wallet. In its second quarter, the app’s gross profit was up 200% from the year before, which bumped SQ stock to an all-time high following earnings.
Square’s secret sauce lies in its two-sided payment ecosystem. The company has created products that cater to both the merchant and the consumer. Its main entity, Square operates a credit card reader that can be plugged into devices to accept payment while Cash App allows customers to send and receive money, invest in bitcoin and buy things with a debit card.
This flexibility of Square’s business model enabled the company to offset losses from its core product Cash App revenue double during the pandemic. Investors should hold on to SQ stock and reap its long-term gains.
SQ Stock Gains Big With Cash App
Analysts and investors have remained largely bullish on Square stock for its strong position in the thriving digital payments ecosystem. The company owns more than 30 products and services, including Cash App that has served as a major catalyst for growth.
At the outbreak of the pandemic, it was clear the Square’s core product was likely to incur losses as small businesses were forced to shut their doors. As expected, the company’s stock dropped by 55% from February to March. However, Square’s rapidly growing Cash App proved to be its lifeboat in its hour of need.
The app was well-poised to break barriers and disrupt traditional banking, with its peer-to-peer payment tool but the pandemic accelerated the app’s usage to new highs. Between March and April, activity on Cash App nearly tripled as it emerged as a digital alternative to banks. Users could also receive their stimulus checks from the government with the direct deposit feature.
Analysts estimate that Cash App is now worth more than $40 billion, accounting for more than half of Square’s market capitalization. This means that although Square’s credit card reader hasn’t seen too much traction since the pandemic, the success of Cash App is reason enough to remain bullish on SQ stock. The app doesn’t rely on in-store sales but earns its revenue on a 1.5% fee on each transaction.
Cash App Is The Way Forward For Square
As in-store sales continue to remain low for the foreseeable future, Square’s success will be heavily reliant on the performance of Cash App. In addition to distributing stimulus payments earlier this year, the app has also seen increased activity on its other features like Cash Card and bitcoin investing.
The spike in digital payments on Cash App was a boon for Cash Card, which was introduced to streamline payments the app. In June, Cash App saw nearly 30 million transactions on its platform, of which 7 million were done using Cash Card. The relationship between the number of direct deposits and Cash Card led the company to integrate the two features. Users that have a Cash Card will also receive a routing and account number that can be used to pay bills and receive money.
In the quarter ending in June, SQ stock (fueled by Cash App’s growth) saw record-breaking earnings with a 63.8% increase in net revenue to $1.92 billion. $875 million of this revenue was from bitcoin investments on the app. In terms of gross profit, bitcoin generated a total of $17 million which is not too shabby.
But Cash App’s fame isn’t just limited to the digital payments world. According to The Hustle, more than 200 artists have name-dropped the app in their music over the years. More recently, rappers Cardi B and Megan Thee Stallion promoted the app and their new single “WAP” with a $1 million giveaway for fans who tweeted the artists with their Cash App usernames, or “cashtags.”
The Bottom Line On Square
Given Cash App’s impressive performance over the course of this year, the platform does have its critics. Many believe that the app’s success is fleeting and was mostly bolstered by the distribution of stimulus checks. Once in-store spending reaches its pre-pandemic levels, it could dim the company’s current growth rate.
Nevertheless, it’s worth considering that the effects of the pandemic could create permanent changes to the digital payment landscape. SQ stock is likely to experience volatility as we shift towards a new normal, but investors should hold on to the stock for its long-term potential.
On the date of publication, Divya Premkumar did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Divya Premkumar has a finance degree from the University of Houston, Texas. She is a financial writer and analyst who has written stories on various financial topics from investing to personal finance. Divya has been writing for InvestorPlace since 2020.