All things considered, Square (NYSE:SQ) has shown strong results in 2020. The company has managed to retain and grow its gross payment volume slightly on the Seller side of the business. Meanwhile, Cash App has seen strong adoption in 2020 along with monetization improvements, leading to gross profit more than tripling in the third quarter.
But Square thinks there’s a lot of room to grow both sides of the business and capitalize on the momentum it’s building as we head into 2021. CFO Amrita Ahuja plans to invest $800 million to $850 million in incremental operating expenses next year. Here’s how she expects to break down the budget.
Marketing and customer acquisition
Square will build on its various marketing campaigns and build up its salesforce in 2021. Overall, sales and marketing will account for about half of the increase in operating expenses next year, Ahuja said.
Within Cash App, the company will focus on acquiring customers in new demographics and reengaging former customers. The company launched its first ad campaign for Cash App in December 2019, and it’s seen strong return on investment from new users it’s brought in. New Cash App users are adopting more products within Cash App than older cohorts, which leads to higher monetization rates. As such, there’s an opportunity to invest even more than originally planned.
One area Square will focus on within Cash App is building on the network effect. So, giving existing users incentives to get their friends to use the app should play a major role in the marketing budget.
On the Seller side of the business, the company is focused on international and larger sellers. Over the last couple quarters, Square has been running brand advertising across television, radio, podcasts, and other media to grow the top of the funnel, particularly in those two areas. It’ll build on those campaigns while using the larger influx of leads to do more performance advertising and bring new sellers onboard.
Larger sellers accounted for 61% of gross payment volume in the third quarter. That’s a step up from 56% in the third quarter last year. Meanwhile, international seller gross payment volume grew 46% year over year versus 12% when you include the U.S. Next year, Square plans to increase marketing spend for its Seller products by 40% to 45%, doubling sales headcount to focus on more of the needs of larger businesses.
About 25% of the incremental spend will go toward developing new products across the Cash App and Seller ecosystems.
Ahuja didn’t provide any specifics about Cash App. The company has managed to roll out new features at a pretty quick pace over the last few years, adding Cash Card, Boosts, bitcoin and stock investing, and a cash advance feature among other small improvements. Ultimately, Square wants to offer anything a traditional bank might offer and more. That could mean lending products like a personal line of credit or credit card are in the pipeline. Rival PayPal offers both, including a recently launched Venmo credit card.
The plan for Seller products is to expand vertical-specific features and developer APIs. Square has seen a lot of success with Square for Restaurants and Square for Retail. There’s room to focus on more features within verticals and cater specifically to larger sellers. Greater ability to manage multiple locations, managers, and other scaling problems could be on the docket.
Square also hopes to expand its product offerings in international markets. Management pointed out three-fourths of its U.S. products are available in international markets. Improving that ratio could help increase engagement across international sellers and Cash App users.
General and administrative expenses
As Square grows its total users and products across both ecosystems, there’s an increasing need for support and operation infrastructure to keep customers happy. About 25% of the incremental spend will go toward those areas.
But Square isn’t just adding manpower; it intends to lean heavily on artificial intelligence and machine learning to support customers. As a result, “the magnitude of the step-up to be onetime in nature,” Ahuja said on the company’s third-quarter earnings call. “We envision operating leverage in this area in the future, because of the investments in things like AI and machine learning.”
The investments in marketing, product, and support are indicative that Square believes it still has a lot of growth left. The fintech company sees a total addressable market of $80 billion in the Seller ecosystem and $60 billion for Cash App. The company’s on pace for combined revenue (excluding bitcoin) of less than $5 billion in 2020. It’s just getting started. While the investments will weigh on operating profits next year, they’re supported by Square’s strong results in 2020 and the potential payoff of scaling toward that $140 billion opportunity.