Morningstar | Cross-Selling Drives Square’s Growth in 4Q
Square finished the year roughly in line with our projection and issued guidance for 2019 that is slightly ahead of our expectations. In balance, though, we remain comfortable with our $44 fair value estimate for this narrow-moat franchise. While Square still has a lot of growth in front of it, we continue to believe the current market price reflects more of a best case from a long-term perspective.Square revenue growth remains impressive, with adjusted revenue up 64% year over year, or 53% excluding acquisitions. Gross payment volume was up 28% year over year as Square continues to penetrate the acquiring space. However, cross-selling is increasingly critical for Square in maintaining its growth rate. To this end, subscription and service year-over-year revenue growth of 112%, excluding acquisitions, shows the company executing on its plans to further monetize its merchant base. While we think cross-selling represents a meaningful and lucrative long-term opportunity for Square, we would note that our enthusiasm extends primarily to services with a strong strategic fit with the acquiring business.
The Cash App doubled year over year to 15 million monthly active users in December. However, we think the long-term revenue opportunities for this business are limited, and Square faces stiff competition from larger person-to-person platforms that are backed by companies with established consumer customer bases. We remain concerned that the Cash App will ultimately prove to be a distraction from opportunities that we view as more value-creative in the long run, such as international expansion of the acquiring business.
Square continues to operate at a small loss. Adjusted EBITDA margins did improve to 17.5% in the quarter, compared with 14.6% last year. However, we would note that the adjusted margin excludes stock compensation, which is a material expense for Square. We continue to believe the Square’s growth and the scalable nature of the business model will allow for strong margin improvement over time, but also that the limited volumes generated by the company’s micro-merchant base will keep long-term margins at a level lower than larger acquirers.
Square is a commerce ecosystem that combines software with hardware to enable sellers to turn mobile devices and computing devices into payment and point-of-sale solutions. With the company's offering, a seller can accept payments via magnetic stripe, Europay, MasterCard, and Visa, or Near Field Communication; or online via Square Invoices, Square Virtual Terminal, or the seller's website or app. Also, sellers can gain access to reporting and analytics, next-day settlements, digital receipts, payment dispute and chargeback management, security, and Payment Card Industry compliance. The company's Cash App enable individuals to send and receive money electronically to and from individuals and businesses.
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