Garvit Bhandari breaks down Square's two businesses: POS systems for small merchants and the Cash App. Cash App grew from 5 million to 30 million monthly users in three years, with Q2 sales up 361% year-over-year. At 9x forward sales, Bhandari sees room to run in markets where Square has under 3% penetration.
Hello investors and welcome to Fresh Look from LeftBrain Investment Research. Today we are putting the left-brain lens on a name called Square Inc. This is Garvit Bhandari, research analyst at LeftBrain Investment Research. You would have probably heard of the name Square Inc. Today I'm going to discuss its strengths, weaknesses, and offer a view on why this could be a good long-term investment opportunity. Square Inc provides small and medium-sized businesses with very affordable point-of-sale solutions which makes it very easy for sellers to accept credit card payments. This is just one part of the business. The other part of the business is the personal finance business, which revolves around its Cash App. Cash App is very similar to Venmo, which allows users to send and receive payments. Lately, the company has built a whole ecosystem of services around its Cash App. This includes allowing users to invest in stocks, bitcoins, direct deposits, and a whole range of other personal finance services. It even offers a debit card which is called the Cash Card. We think Square Inc. can be a great long-term investment opportunity and there are several traits that we like about the firm. First is its large addressable market. On the seller ecosystem side, the addressable market opportunity is roughly $85 billion while on the Cash App side it's roughly $60 billion. This is a very, very large market and Square Inc. has barely scratched the surface. It has less than 3% penetration on the seller ecosystem side and less than 2% penetration on the Cash App ecosystem, leaving significant runway for future growth. Potential. Second is the impressive growth shown by its Cash App. From nearly 5 million monthly active users to roughly 30 million monthly active users, the Cash App has grown by 6 times in a matter of just 3 years. Even during the recently concluded Q2 results, the Cash App delivered very impressive numbers. The sales grew by a whopping 361% year on year, while gross profit increased by 167%. We are very excited about the potential of Cash App, and we think this could be a driver of future growth for the firm. Lastly, valuations are very reasonable. The stock is currently trading at 9x 1-year forward sales, which we think is not too expensive given our view that sales could easily grow in excess of 30% over the next 2 to 3 years. The stock fits very well with the overall LeftBrain stock selection philosophy. Here at LeftBrain, we look for high-growth, high-margin profitable franchises that have large addressable market opportunity, and Square Inc nearly ticks all of those boxes. That is the reason we rate Square Inc a green light. For more investment insights with a view through left-brain lens, please visit us at leftbrainir.com. Be a part of the growing community of left-brainers who experience informed decisions and independent thoughts that power our search for profitable investment opportunities. This is Garvit Bhandari from Left Brain Investment Research. See you next time.
