Square Continues to Grow, Cash App Momentum Slows in Q3

Square SQ maintained fairly heady growth in the third quarter, but growth in the quarter was more muted than we have seen in recent quarters, suggesting the company’s momentum, especially on the Cash App side, might be starting to slow a bit. However, this was likely inevitable, and we see nothing in the quarter to materially alter our long-term view. We will maintain our $112 fair value estimate and narrow moat rating.

Cash App revenue grew 16% year over year, or 33% excluding bitcoin revenue. Gross profit increased 33% year over year. This is a material comedown from recent growth rates for this business, but the company is coming up against increasingly difficult comps. Bitcoin activity was a bit more subdued in the quarter, with bitcoin revenue up only 11% year over year. Management attributed that to relative stability in the price of bitcoin during the quarter, and Square continues to work on new bitcoin-related offerings. We would reiterate that we think bitcoin’s value to Cash App is primarily as a marketing lure, as opposed to direct profitability generation, given the small bid-ask spread on bitcoin transactions.

The seller segment grew revenue 44% year over year, with a two-year CAGR of 23%. Square continues to move upmarket, with merchants generating over $500,000 in annual payment volume accounting for 37% of gross payment volume in the quarter, up from 31% last year. We think the performance of the seller segment through the pandemic supports the idea that Square has built a sustainable business on this side, and has a significant secular opportunity going forward. However, we would note that Fiserv’s Clover has seen stronger growth over the past two years.

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