Square, Inc has grown from a scrappy
payments startup to a $26
billion FinTech giant.
Square shares soaring on Thursday.
I love this stock.
It's Square SQ the payment technology
company that can turn any smartphone or
tablet into a credit card reader.
Not bad for something that started off
as a side project for Twitter inventor
Jack Dorsey. We're building a tool for
small businesses that actually rivals
and is much better than what most big
businesses have. Square credits its
success to a mission of economic
empowerment, giving business owners an
ecosystem of tools to seamlessly accept
payments and finance growth.
We have designed a beautiful experience
for our buyers and sellers that has
really set us apart in the industry.
But critics wonder if it's overvalued
and getting distracted from its core
business as it faces fierce competition
on all sides.
This is clearly broken. It's like the
trend is not there. Still way too
expensive. More downside to go.
We are steering clear of this one.
So how does Square make its money and
can its growth spurt last?
The company's beginnings are said to
trace back to a St.
Louis area glassblowing studio in
2009.
Jim McKelvey owned the studio and like
many small business owners around the
country, he faced a daily dilemma of
whether or not to accept credit cards.
He could use a complex structure of
exorbitant fees to run any kind of card
or only accept some forms of payment
and watch a chunk of his customers walk
out the door. A computer scientist and
economist by training McKelvey figured
there had to be a way to create an
affordable and simple card processing
system for small business owners like
him. And lucky for McKelvey.
He happened to have an old friend who
could help him make that happen, Jack
Dorsey. Dorsey and McKelvey realized
that almost everything you needed to
run a card already lived inside a
relatively new and increasingly popular
invention, the iPhone.
Computer chip, network connection,
TouchPad for signing...
the only thing missing, a card reader.
So the two got to work building a
little square shaped reader capable of
plugging into a headphone jack.
That square reader became the company's
namesake being released to the public
in 2010. Square would send out the
reader for free.
Then, like most other card processing
companies, Square took a cut of every
swipe 2.75%
plus 0.15.
But that was it. Unlike other
processors, Square did away with
complex contracts and additional fees.
And soon it even dropped the one extra
fee it did have, that 0.15
on top of every transaction.
By early 2011, the company was
reportedly shipping 50,000 readers
and processing $66 million in
payment volume. We sat down with
Square's hardware lead, Jesse
Dorogusker, to learn more about the
company's design ethos.
At the very beginning, we were really
just trying to build the simplest thing
we could for as many people as
possible. A free piece of hardware that
was very simple, plugged into the
smartphone you already have, download a
free app, get started in five minutes.
Suddenly that housecleaner, dog
groomer, farmers market vendor, cash
only takeout restaurant or even cookie
selling Girl Scout troop could all
swipe credit cards.
But then something interesting started
happening. Sellers who could afford to
pay standard card processors started
using Square. Checking out on a sleek
Apple product became trendier in many
ways than using a standard card reader.
By 2013, the company said it was
processing $15 billion per year.
We're not just for small businesses.
We can't be a company that says, hey,
we only serve small businesses because
that means as soon as they grow, which
is part of our mission to help them do,
then they would grow out of us and we'd
have to point them somewhere else.
We're going to make sure that they see
us all the way along the path.
And as they go from 10 locations to
20 locations or from a coffee cart to
the size of a Starbucks, we can handle
both extremes. Square started to
realize it had the ability to compete
in these larger payment processing
business, creating an ecosystem of
hardware and software products
businesses could pay extra to take
advantage of. There was Square stand
which could replace a register, a suite
of software products to help manage
things like payroll, and even small
business loans. Building off that
momentum, Dorsey took the company
public in 2015.
An important day for tech as Square,
the mobile payments company, goes
public at the Big Board.
CEO Jack Dorsey is due to ring the
NYSE opening bell.
But ringing the opening bell with his
mother, Marsha Dorsey.
Not a bad Twitter follow in her own
right.
3.7 million shares of Square
open at $11.20.
That's a very good price.
I mean, it's all about getting the
business of accelerating the business.
And that's what we came here to do
today. And we did it. But after the
billion dollar company went public, its
share price started faltering, dipping
below its IPO price three times in
less than a year. Analysts began
questioning whether Dorsey could run
two major companies.
It requires a full time CEO.
I know Jack's being stretched and
pulled in different directions with
these two firms.
Jack's an incredible product thinker,
an incredible person, but I think it's
hard to see both companies going
through the cultural change as public
companies while his time is split.
New trendy payments companies like
Toast and Clover started pushing into
Square's core market.
Then Square reported worse than
expected losses.
I read a lot of analysts notes who
think they just have no path to
profitability like ever.
But Jesse says Square has always been
able to offer something its competitors
struggle to replicate.
What's really powerful about building
an ecosystem top to bottom, the
hardware the software that runs on the
hardware, the iOS and Android apps and
all the backend systems is that you can
really observe how they all work
together. Our competitors in this space
are much more siloed. And in
retrospect, the stock did rebound.
A big part of that rebound came from
growth in a part of Square's business a
lot of people don't even know exist,
Square Capital. While Square is not a
bank, it partners with financial
institutions to offer loans to many of
its small business sellers.
Jackie Reese, head of Square Capital,
sat down with us to explain how a
payments processor got into the loans
business. We started lending years
ago after listening to our sellers talk
about their biggest pain points.
What Square says they discovered is
that a ton of these sellers just
couldn't get access to capital from
traditional banks. Our biggest
competition is competing with friends
and family. It's not going to a bank
because banks don't even come close to
offering loan sizes that are in the
scale that we offer at Square Capital.
Sixty five hundred dollars or a five
hundred dollar loan or a fifty thousand
dollar loan. And so when a small
business owner wants to gain access to
credit, they have an emergency on a
Saturday morning before Square capital
they would go ask the parents.
They would go ask their sibling, which
is in many cases an uncomfortable
relationship to be in.
Square's payment ecosystem gave it a
unique look inside businesses that most
lenders never had.
It's very unusual to have real time
data, which can show revenue of a
business regardless of how small it is.
We can see increases, decreases, number
of transactions per day, types of
credit cards, day to day business
behavior based on the types of
transactions that happen in a business.
We think that type of granular data is
extraordinary in terms of understanding
risk. In fact, they say this data is so
powerful that they don't even use
credit scores. Instead, they run their
own AI based model daily, extending
loan offers directly to thousands of
businesses via the Square dashboard.
Square also developed a different model
for getting paid back.
Once a seller takes out a loan, they
pay it back based on their average
daily card swipes.
So that if their business grows faster
than expected, they pay back more.
If their business is a little bit
slower, they're closed for a day, they
don't have the pressure of paying back
the loan. To protect themselves from
holding all of this risk on their
balance sheet, Square also sells off
the loans for a lump sum to other
companies and then continues to collect
a servicing fee from the buyer until
the loan is fully repaid.
After dipping its total into the market
with one point eight billion dollars
lent out to more than one hundred and
forty thousand businesses, the company
announced its intent to go all in with
a bank charter application in 2017.
It's a move that could give Square a
leg up on an even wider array of tech
companies offering small business
loans– like PayPal, Amazon and Stripe.
Square has also upped its game against
other fintech competitors with Cash
App. Originally launched in 2013, the
Venmo like peer to peer cash transfer
app opened a whole new market for
Square. Cash that really came out of
nowhere. I mean, this was not a
meaningful piece of the business two
years ago now it's a quarter of
revenues and far outgrowing the rest of
the business. Like Venmo, Cash App
makes money by charging small fees to
link credit cards instead of debit
cards and for expedited balance
withdrawals. I think the popularity of
peer to peer apps is because of the
utility that they offer.
You can see the structural growth of
that market evolving for decades.
There's so much opportunity for banking
services across peer to peer apps
because they really save consumers a
trip to the bank. Square already offers
a collection of banking services on the
app through its partner banks and has
stayed relevant with younger audiences
by offering the ability to trade
cryptocurrency on the app– a passion
project of CEO Jack Dorsey.
It does provide an opportunity to give
more people access to the financial
system. So we're going to make sure
that we are learning and leading here.
In 2018, Cash App's users doubled from
7 million to 15 million
and there may be more growth ahead.
We would absolutely expect that they'll
start to extend credit on the consumer
side through Cash App.
Probably fairly soon.
It's a no brainer extension.
By late 2018, Square had hit its
stride. Its core payments business
continued growing.
While Cash App's unexpected resonance
wowed investors and the small business
loans' high performance teased a huge
new banking market.
The success made Square a Wall Street
darling. The outperformance here is
Square. The stocks had an incredible.
Run it up 100 percent year to date.
This is a potential $50 to $60 dollar
opportunity, pushing the stock high
from its post IPO low of just below $9
to $99.
But then Square's future began to look
a bit more uncertain.
Tough day for Square investors.
That stock plummeting. A Square beat
down, the stock falling nearly 30
percent since August.
Suddenly this former market darling, it
has become a complete battleground
stock. Some analysts began to
wonder if the company had lost focus.
Their GPV growth, which is their core
volume growth, purchase volumes, the
volumes of payments running over their
point of sale systems decelerated for
the fifth or sixth quarter in a row.
And investors are getting very nervous
about why that core business, which
generates all the profit of the
company, is decelerating.
Is it because they're just not
investing in sales and marketing
sufficiently? Which we think is what's
been happening and now they're upping
the investments and everything would be
rosy again? Or actually, is there a
deeper problem that that they're
starting to struggle a little bit with
growth? This focus issue came front and
center when Square sold Caviar, its
high end meal delivery service.
That market is just fiercely
competitive. That business has had
dramatically slowing growth over the
last year. It's very unprofitable.
It's very labor intensive because it
has all these delivery people.
It's just not anything as attractive as
the core business. And so, you know,
we're thrilled they sold it.
Some analysts have also begun to worry
whether Square can sustain such
positive returns on its loans,
especially if the U.S.
experiences an economic downturn.
Square, however, has pushed back hard
against this assertion.
If there is a downturn, we think we're
incredibly well positioned.
Payment processing isn't discretionary.
It's how people run their business.
Second, as it relates to capital.
Interestingly, our loans are 9 month
duration. So these are very short
duration and they can adjust to the way
that the payments models adjust
literally every day.
These concerns have likely contributed
to a lagging stock in 2019.
Even as other companies like Visa,
MasterCard and PayPal hit a rally.
Of course, the payments giant has gone
through changes and dips in its stock
price before. The question now becomes,
is Square losing an edge?
Or just gearing up for its next big
play?