Square (NYSE: SQ) is one of the leading payment-processing businesses in the United States, and it's starting to expand abroad as well. While other payment platforms have focused on the growing e-commerce market, Square began with small businesses that wanted a quick way to start accepting credit and debit cards in their stores without a lot of start-up costs.
Today, Square processes over $1 billion of payments every week, and that number continues to grow rapidly. Here's a look at Square's payment processing business in five charts.
Continue Reading Below
1. Gross payment volume
From the first quarter of 2014 to the first quarter of 2017, gross payment volume on Square's platform tripled. Square's progress comes from adding more merchants to its platform every quarter and retaining them over the long run.
The company invests heavily in sales and marketing, which accounted for 11% of revenue in the first quarter. That's actually a slight increase from the first quarter last year, when it spent 10% of revenue on attracting new merchants and growing the business. But the continued growth in payment volume -- up 32% year over year -- is a sign the investment is paying off.
2. Gross payment volume mix
Square started focusing on larger sellers (annual gross payment volume greater than $500,000) in the last couple years. Management sees large sellers as a big opportunity because they're significantly more efficient in terms of return on investment. Larger sellers may cost a bit more in customer service, but they generate more payment volume and are more likely to use Square's other offerings, like its business loan segment or payroll and invoicing services.
As Square brings on more large merchants, it should have an easier time improving its profit margins.
3. Adjusted revenue and EBITDA margin
Square uses an internal metric to measure its revenue growth called adjusted revenue. It removes the impact of its deal with Starbucks, which was useful in getting its service off the ground, but not so useful in terms of generating a profit. Square also adjusts for transaction-based costs.
As you can see, Square has produced positive EBITDA margins in each of the last four quarters. CFO Sarah Friar indicated investors should expect mid-single-digit margin expansion for the foreseeable future with a long-term EBITDA margin target of between 35% and 40%.
4. Payment retention
Each new merchant Square brings on board averages more payment volume the next year than it did before. Surely some merchants ditch the platform or go out of business, but on average each cohort generates 107% more payment volume after one year.
That number improves further when you add in Square's other services like Square Capital, invoices, payroll, Caviar, and more. And the profit margin on those services is generally higher than payments due to both higher gross margin and lower marketing expenses.
5. Payback period
Despite investing heavily in sales and marketing, Square is generating enough revenue from its merchants that it recoups its investment within four to five quarters based on payment volume alone. When you add in its other services, Square recoups marketing expenses within a year.
After two years, Square saw a 1.7 times return on investment on the marketing expenses it outlaid in the first quarter of 2015. As it adds more services, Square may see faster payback periods and higher returns.
As the payback period improves, it gives Square more capital to reinvest in scaling its business. It's shown an ability to attract more customers at a better return on investment while improving its profit margin, so investors should expect it to keep plowing money back into the business.
10 stocks we like better than SquareWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Square wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of July 6, 2017