When we added Square to the Rise Stock Index many months ago, what attracted us to the company is its innovative products (about 30 of them) strategically chosen for an ecosystem play. With Square, a business can run an end-to-end business operation and Square has positioned itself to capture value at different layers of the ecosystem.

In the last year alone the stock has grown by about 100%. Contributing significant growth to the index.

Growth isn’t slowing yet for the $100 billion company. In its recent earnings report (Q2) it reported revenue growth of 143% including revenue from Bitcoin and 87% revenue growth when Bitcoin revenue is excluded. The gross profit of its two core business segments CashApp and Seller grew 94% YoY and 85% YoY respectively in the second quarter. 

In its investor’s presentation Square notes that its focus is on strengthening the health of its network. And in doing so, CashApp reached 40 million monthly transacting active customers in the quarter. Square’s strategic play is obvious; from the same investor’s presentation, it noted that Square “is focused on attracting customers who could use more products and bring greater funds into its ecosystem.” A focus that we believe is paying off as revenue has been increasing with the growth of customers.

Among Square’s plans to deepen its ecosystem play is to make strategic acquisitions. Earlier in the year, we wrote about what its acquisition of TIDAL might mean. And now, we have a new acquisition to talk about; AfterPay.

The AfterPay Acquisition

To ensure its continued growth both in a new vertical and new territory, Square has decided to acquire AfterPay. AfterPay is a Buy Now Pay Later (BNPL) category-king from Australia. It has a presence in 2 countries where Square isn’t present (Australia & New Zealand). AfterPay has 16 million active customers on its platform and 100 thousand merchants globally. From whom it generated revenue of AUD519 million in the 2020 financial year. 

It appears there is a lot of synergy in the acquisition. To summarize the strategic benefit, Jack Dorsey, CEO of Square said in a press release that “combined, Square and Afterpay’s complementary businesses present an opportunity to drive growth across multiple strategic levers, including:

  1. Enhance both the Seller and Cash App ecosystems
  2. Bring added value, differentiation, and scale to Afterpay and
  3. Drive long-term growth with meaningful revenue synergy opportunities.”

Putting a number to the anticipated synergy, Square highlighted the BNPL opportunity quoting approximately $10 trillion of online payments with only 2% BNPL penetration. Meaning Square believes there’s yet significant room for growth for the BNPL business model. 

To realize this opportunity, AfterPay will be integrated into both Square’s online and in-person checkout solutions as well as CashApp. This will augment Square’s omnichannel capabilities and drive repeat engagement. 

Another immediate benefit that Square gets from this acquisition is the instant presence in Europe and Australia. AfterPay customers of 16m and merchants of 100k are spread across many regions including New Zealand and Australia where Square currently has no presence. 

What’s outstanding about AfterPay is the quality of its customers. Customers spend 29.1x of their first year total after 4 years and 20.7x after 3 years (for Australian and New Zealand customers). The BNPL business model is impressive and it shows clearly that it has the potential of disrupting the traditional credit model.

There’s been some mixed reaction about the acquisition but we believe that Square is on the right track with the acquisition. And the market seems to agree with that assessment as the Square stock price is up by about 15% since the deal was announced.

One thing is clear, we will continue to keep our eyes out for quality assets that can be added to the Rise Stock portfolio and won’t hesitate to sell our investment in any asset that we believe doesn’t fit into the objective of the Rise Index.

Hello, Square, what’s the end game?

Online payment is expected to reach $10 trillion by 2024. To take a large chunk of the pie would require greater ambition. And we believe that is the ambition Square is pursuing as an end game.

In February, Square acquired TIDAL. In July it announced the acquisition of AfterPay. Square has been an active advocate of Bitcoin and currently put out a job advert looking for someone to help develop a hardware wallet for Bitcoin. And even more compelling is that Square is building a new decentralized finance business

We believe all these efforts are optimized towards just a goal that resurfaced a lot in this Q2 shareholders update. “To attract customers who use more of Square products and bring in more funds into the Square ecosystem” on the side of the individual customer (CashApp) and to be the cohesive ecosystem for all merchant needs (Seller).

Achieving this would require all the strategic bets that Square has been taking lately and more. Including being at the forefront of what tomorrow might be the most resilient payment system (Bitcoin). Other bets (like TIDAL) are taken both to strengthen existing product growth (influencer marketing) and serve a new kind of customers (Artists). What’s obvious from where we stand is that Square wants to be the cohesive ecosystem of all kinds of payment online or offline. And that is an ambition that we support at Risevest. We like it when our portfolio companies are thriving and ambitious. 

This is not the end of the Square story. It’s still early and there is a long haul ahead. 

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