COMPANY NAME

INDUSTRY/ VERTICALS

investment theme

Square

Technology, Digital money, Financials, Peer to Peer Payment, Point of Sales, Digital Banking

(1) Shift to Cashless Society

(2) Digital Banking

(3) Data Over Everything

SQUARE STORY

AVORY BRIEF (5 MIN)

Disclaimer: Avory & Company was an investor in the company above at the time of this writing, however, this may change at any time.

This is not a recommendation of the purchase or sale of any securities mentioned. 

 

ELEVATOR PITCH (30 SECONDS)

Square continues to innovate across multiple ecosystems. The Square seller business is more mature however they are a strong player for in-person selling, along with a growing focus on digital selling. Cash App is a fast-growing digital banking platform. We could envision this being what PayPal was to eBay. Square also started Square Crypto, which is allowing them to participate in a potential shift in payments. They have hired some of the brightest minds in the space. All in all, Square is a platform of platforms with steady execution. 

MANAGEMENT

Mission-driven management with a history of execution. 

FOUNDER LED

Yes

BUSINESS MODEL

Self onboarding for most of their products. 

QUALITY

High quality, high cash business with diversification across business segments.

GROWTH PROFILE

High consolidated growth of over 20% with Cash App growing in the 75-120% range.

VALUE

Strong returns on investment and valuation that is cheap relative to our vision of the future. 

ECONOMIC MOAT

High barriers for Cash App given network effects. Square Seller less moaty, however the moat is driven by the brand, along with switching costs once sellers adopt multiple products. 

MANAGEMENT HIGHLIGHTS

FOUNDER LED + Excellent team

Jack Dorsey: Chief Executive Officer

Jack is CEO and Chairman of Square, CEO of Twitter, and cofounder of both.

Amrita Ahuja: Chief Financial Officer

Amrita is Square’s Chief Financial Officer. She replaced Sarah Frier, which in our view is a tough task. She has impressed beyond our highest expectations. She was previously CFO of Blizzard Entertainment, a division of Activision Blizzard, and held various leadership positions at Fox Networks Group, the Walt Disney Company, and Morgan Stanley.

 
 

Company overview

TWO ECO-SYSTEMS WITH DEVELOPING PRODUCT PORTFOLIOS.

Square has built a powerful two-sided engine that serves both merchants and consumers. The Square Seller business is a cohesive commerce ecosystem that helps sellers start, run, and grow their business. It enables sellers to turn mobile and computing devices into powerful payment and point-of-sale solutions. The platform provides solutions such as analytics, reporting, order management, inventory, locations, payroll, marketing tools, and access to business loans. Their approach is the same with Cash App as they build a similar ecosystem of services for individuals, providing financial access to all and allowing anyone to send, spend, and save money all from one app.

 

PRODUCT PORTFOLIO

RAPID PRODUCT EXPANSION

Square has shown its ability to adapt and create with sharp execution. Below highlights the evolution of Cash App where they started with a simple concept of sending money between peers. In 2017 they announced Cash Card which allows users to use their Cash App balance with a debit card. In 2018 they added bitcoin trading, a rewards-like program called Boost, and direct deposits. In 2019 they added stock investing. Throughout this process, they saw a growing user base along with increasing engagement, a powerful combination. Throughout this time, they also increased monetizations. 

As Square continues to build its userbase, we foresee its product portfolio expanding beyond what we see today. With over 24 million monthly active users, we believe that Cash App is ripe to become a viable financial alternative to traditional banking. 

BUSINESS MODEL

PROBLEM

Traditional banking does not have the same DNA as the new financial players such as Square. This has led to cumbersome processes and an entire part of the population that has been left behind.

SOLUTION 

Square started with a simple tool for merchants to make a sale. This allowed smaller vendors to have the same resources which only large vendors could traditionally afford. Square began offering a broader suite of solutions with a mission to solve real problems. 

PARTNERS

Square is vertically integrated. They create their own hardware and software internally. Over time they have prioritized where it makes sense to partner. Delivery is a good example where they recently sold Caviar in order to remove this low margin segment and partner with the market of delivery services. 

TARGET CUSTOMER

Square Seller targets vendors of all sizes. With large merchants such as the Golden State Warriors or WWE, or smaller sellers like 1-2 employee vendors. Cash App targets unbanked and unsatisfied banking customers who are looking for speed and ease of use. 

VALUE PROPOSITION

The ability to provide an all in one solution that scales. 

SELLING MOTION 

They have a strong self-serve model. They are also increasing support and corporate sales as they expand their offering. 

COST STRUCTURE

Transaction costs are variable to transaction volume. Software and subscriptions are high +70% gross margins and mostly reoccurring. 

REVENUE DRIVERS

They generate revenue in various forms. Mostly through transactions via Cash App and Square merchant transaction volume. They generate revenue through their Square Capital loan business, along with instant deposits. 

 
 

NOTABLE CUSTOMERS

SMB TO UPPER MID MARKET

 

GO TO MARKET STRATEGY

MULTIPLE OFFERINGS

As Square has increased its product portfolio they have been able to land new customers in different ways. For example, we are a Square Payroll customer and have a Cash App registered business account. In prior years, Square could only sell to customers who wanted to sell goods and needed a point of sale.  

 

MARKET OPPORTUNITY

LARGE MARKET + GROWING SHARE

Square is going after a large and evolving market. This bodes well as they have proven the ability to adapt and take share in a profitable way. The total market size as per Square is $180B, in which they have around 3% total share. While the market size is no exact measure, we do believe that Square will continue to expand its offering which will expand its target market even further. 

 

COMPETITION

ESTABLISHED COMPETITORS

Square Seller is a highly competitive market driven by commodity merchant services and basic point of sale technology. Square has won with ease of use and an expanding product portfolio. The seller business goes up against POS solutions such as Toast, LightSpeed, and Clover which may have vertical advantages. Cash App goes against Venmo and other digital banking-like solutions like Chime and Robinhood. Cash App also competes with traditional banks that are trying to embrace a technology culture. 

ECONOMIC MOAT

Intellectual Property: Square has a brand that vendors and merchants are proud to present to customers. In addition, they have a platform of solutions build in-house as opposed to an integration first approach. This allows them to adapt as we have seen in the COVID-19 situation where they quickly rolled out curbside pickup.

Switching Costs: When Square is able to attach multiple solutions to a Square Seller we believe that this customer has an inherent cost to switch. 

Network Effects: Cash App does have network effects. The app had over 24 million monthly active users as of December 2019, and we expect this figure to be much higher. 

Low-Cost Production: Against industry incumbents, Cash App does have a cost advantage given they do not have the fixed physical expense of traditional banks. 

 
 

METRICS

ORGANIC GROWTH WITH MARGIN EXPANSION ON THE HORIZON

Square checks many of the boxes of a lifetime compounder. Square has two growing markets in which they are taking market share, along with growing into new markets. In addition, they are seeing margin expansion as their selling motion improves and they find new ways to monetize. 

Disclaimer: Avory & Company was an investor in the company above at the time of this writing, however, this may change at any time. This is not a recommendation of the purchase or sale of any securities mentioned.