As we already know, Twitter’s (TWTR) CEO Jack Dorsey profoundly stepped down from his permanent position of the company’s CEO after nearly 16 years at the company, with CTO Parag Agrawal taking over. We speculate, the move is not only backed by a poor market performance of Twitter (TWTR) stock, but by Dorsey’s long-time strive to focus on his second loved child, payments platform Square (SQ), a company which he also founded.

 

Having said that, Dorsey will definitely remain CEO of Square (SQ). Dorsey cited the reasoning behind his decision as being rooted in his belief that company founders serving as CEOs is “severely limiting” and represents a “single point of failure.”

Why is it important for us to assess current performance and future prospects of the digital companies like Square, Inc.? It’s because according to researchandmarkets.com, the global digital payment industry is expected to grow at a compounded annual rate (CAGR) of 20% and reach a value of $175.8 billion by 2026. This growth will be primarily driven by the increasing penetration of e-commerce platforms and the growing number of small businesses that are changing their business models to embrace digitalization. The increase of smartphone usage in emerging countries and the growing demand for contactless payments will also boost the digital payments industry in the coming years.

We expect that the ever-increasing share of the digital payments will have been attributed to Bitcoin and other prime cryptocurrency direct payments for years to come.

The Twitter-Square Uneasy Relationship and Why Crypto is Main Focus

As such, Square, Inc.’s executives – and investors – will bring to focus more attention on the company’s planned acquisition of Afterpay Ltd. in 2022, as the “transformative” deal may close in the first half of the new year. Square is looking to wade into the buy-now pay-later game through its pending all-stock deal for Afterpay, which could boost its seller and consumer-facing Cash App businesses. The deal would also pit Square up against Affirm Holdings Inc. (AFRM ) and deepen its rivalry with PayPal Holdings (PYPL) which also offers BNPL (Buy-now-pay-later) functionalities. Square shareholders have already approved the deal, and Afterpay shareholders are likely to approve it in the next couple of months.

As far back as July this year, I wrote that Square (SQ) frontman Jack Dorsey suggested he was establishing a new business unit that will combine Seller, Cash App & Tidal to focus on “building an open developer platform with the sole goal of making it easy to create non-custodial, permissionless, and decentralized financial services with primary focus is Bitcoin”.

Square launched Bitcoin’s peer-to-peer functionality within its Cash App in the first quarter this year, allowing customers to send the cryptocurrency to friends and family for free using the mobile application. In addition, Square also launched the Cryptocurrency Open Patent Alliance, an open-source foundation for crypto patents aimed at protecting the community.

On July 15, CEO Jack Dorsey announced the company is launching a new business unit called TBD that will focus on Bitcoin transactions. Despite the fierce competition, Square appears to be well-positioned in the developing digital payments market thanks to its expanding range of services, but the company is already trading at ludicrous valuation multiples, which needs to be factored into the analysis before making any investment decisions.

Source: Market Data

Square’s Brief History and Main Investors

Square’s recognition is maintained by a sound portfolio of institutional investors, the largest of which, Morgan Stanley Investment Management, owns a 6.98% stake, followed by The Vanguard Group with 5.8% and Fidelity Management & Research with a 2.97% stake. Square’s total share free float is estimated at 83.9%.

The company had its public debut on the New York Stock Exchange in 2015 and is one of the most successful payment technology companies in the world, competing with payment giants such as Alphabet’s (GOOG, Financial) Google Wallet, Intuit Inc. (INTU, Financial) and PayPal Inc. (PYPL, Financial), which owns Venmo. Its adoption grew in 2020 as more transactions moved from in-person to online, resulting in better-than-expected revenue growth.

Square’s Financial Health

Square’s revenue is the fourth highest among its top 10 competitors. The top 10 competitors’ average revenue is to the tune of $8.3 billion. Square’s revenue has increased by almost 7000% percent over the last four years. Specifically, revenue for Q3 2020 was $6.1 billion; it was $1.9 billion in Q2 2020; it was $1.4 billion in Q1 2020; Square’s revenue was just $86.9 million in Q4 2019. Square ended the Q3 2020 with $3.8 billion in available liquidity, with $3.3 billion in cash and cash equivalents, as well as $500 million available for withdrawal from the company’s revolving credit facility.

Furthermore, Square reported better-than-expected revenue and earnings for the first quarter of 2021. The company said it is expanding its horizons to diversify into new business lines. Square is likely to expand into high-growth international regions in the coming years.

A huge portion of SQ’s recent revenue has been driven by Cash App. In Q1 2021, SQ generated $5.06 billion in revenue. Of that, Cash App delivered $4.04 billion of revenue, of which $3.51 billion was generated from SQ’s Bitcoin services. In other words, Bitcoin activity via Cash App generated 69% of all SQ’s revenue in Q1.

Commenting on the lucrative opportunity available in the cryptocurrency market, Dorsey said:

We see Bitcoin as the Internet’s potential to have a native currency. And we want to further that as much as we can. And a lot of our work really lines up to that. So our focus, first and foremost, is on enabling, and this is going to be a long-term focus, on enabling Bitcoin to be net currency. It removes a bunch of friction for our business, and we believe fully that it creates more opportunities for economic empowerment around the world.”

Twitter and Square Market Performances

In fact, Twitter (TWTR) has been broadly underperforming the Nasdaq since the beginning of this year, while over the last 3 months this discrepancy has accelerated. Over this period Nasdaq rose roughly by 15%, while Twitter lost somewhere around 20% of its share price. Dorsey might feel uncomfortable about the increasing censorship pressure and other judgmental actions required from the company to comply with the complex reality of the modern world. On the other hand, Dorsey sounds genuine in his crypto and decentralization world aspirations. In the medium and long run, his decision to leave Twitter can be very beneficial for Square, whose stock needs a special focus in order to beef up the post-pandemic valuations. Square had been constantly beating analysts’ estimates since at least Q4 2019 until recently, but last quarter earnings disappointed by showing a negative surprise of 2.63%.

Remarkably, Square Inc.’s earnings growth is assumed to be associated with the performance of Bitcoin. So, Cash App by Square, through which Bitcoin is transacted, in the third quarter brought about $ 1.6 billion in revenue, which is slightly more than half of the company’s total revenue.

The reason why Square’s stock dynamics is poorly correlated with Bitcoin is that Square has been heavily investing lately into itself and its growing infrastructure and network. The second most important reason is that Square, unlike Bitcoin, even though it has a Beta of around 2.4, is exposed to overall U.S. equity market volatility, which became materially more static and malicious lately when it comes to global equities due to unpredictability and poor scalability of Covid impact.