Why has Square’s share price dipped despite the cashless boom?

In an increasingly crowded fintech market, digital payment platform Square [SQ] has emerged as a leading force disrupting the payment industry. Square’s share price has soared 361% in the past 12 months to $213.51 on 24 March.

This article was originally published on OptoInvest in the Next Big Idea.

According to data by Simply Wall Street, the stock had a one-year return of 307.5% on 24 March, which significantly outpaced both the IT industry and broader market in the US.

However, Square’s share price performance so far in 2021 has been mixed. Despite an initial 30.1% climb to an intraday high of $283.19 on 16 February, the stock has since trended downwards. Shares in the company have fallen 7.2% so far in March (through 24 March’s close).  

Even a new report by Square showing positive findings for the payment industry’s continued growth, released on 16 March, didn’t help lift the company’s share price — it had fallen 3.1% by the day’s close.

Circa 21.5 million shares in the company are held across 141 ETFs, data from ETF.com shows. Its largest weighting was in the Ark Fintech Innovation ETF [ARKF] at 10.02% as of 24 March. The fund was down 0.5% year-to-date (through 24 March), while Square’s share price fell 1.9% in the same period.

Disrupting the payment industry

Square has been shaking up the payment industry by building an ecosystem that can entirely support a business’ finance operations, from processing payments with its Square Reader to cloud accounting software.

But the company’s most significant innovation by far has been its Cash App, a peer-to-peer payment app, similar to PayPal’s [PYPL] Venmo, which it launched in 2013. Since 2017, Square has continued to expand the platform’s tools, including allowing users to buy and sell bitcoin.

More than 3 million Cash App users transacted the cryptocurrency last year. The platform’s monthly transacting active customers grew 50% year-over-year to more than 36 million in December 2020, and it saw its fourth-quarter 2020 profit rise 162% from the year-ago period to $377m.

The rise in demand for digital payments is a major tailwind for Square’s business. In a recent report released by the company, it stated that share of cashless businesses had more than doubled in the US, Australia, Canada and the UK over the past year.

The report’s findings revealed a “slightly more substantial dip” in cash usage throughout 2020. It suggested this shift away from cash might have taken nearly three years had the coronavirus pandemic not accelerated it.

Felipe Chacon, an economist at Square, pointed out that a year ago there had been no way to tell whether the spike in digital payments would last.

“But today, we can look to markets where the pandemic has largely been eradicated, such as Australia, and see that the increase is sticking with business owners and consumers beyond the pandemic,” he said in a statement.

Tapping into the music business

The shift away from cash is a major growth driver for Square’s business, as it provides the hardware and software for companies to process digital payments. The company’s seller gross payment volume reached $32bn in the fourth quarter of 2020.

Given that the global digital payment market is forecast to grow from $79.3bn in 2020 to $154.1bn by 2025 at a compound annual growth rate of 14.2%, according to MarketsandMarkets, Square’s market opportunity is significant.

However, the company had investors scratching their heads after it announced plans earlier this month to acquire a majority ownership stake in global streaming platform TIDAL.

Jack Dorsey, co-founder and CEO of Square (pictured), said the deal would allow it to “find new ways” for artists to support their work. Jeff Cantwell, a director at Guggenheim Partners, expects the tie-up to eventually add $110m in annual incremental revenue for the company by tapping into the music industry.

Square’s share price was rated a moderate buy among 32 analysts polled by TipRanks, with an average price target of $276.55, representing a 29.5% rise from its 24 March close.

MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.

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