New Square Cash App Users Are Extremely Profitable
Square (NYSE: SQ) added 12 million new Cash App users in 2020, and these users are turning to the Swiss military financial app a lot. The company is increasingly benefiting from the network effect of its core peer-to-peer payment service as well as the expanding ecosystem of services it offers through Cash App. So, not only is this attracting new users faster than ever, but they are using more features than others and generating more revenue and profit for Square.
One of the topics that Amrita Ahuja, CFO of Square, kept coming back to Square fourth quarter earnings call and his letter to shareholders was “the cohort economy”. A cohort is a group of users who all signed up for a service at around the same time. Square has broken down the Cash App and Seller cohorts by year in its letter to shareholders.
Square sees an increase in gross profit from each of its cohorts every year. For example, the gross margin generated by Cash App users who joined in 2018 was higher in 2020 than it was the year before. Ahuja says the company has experienced over 130% year-over-year gross profit retention in each of the past three years for all of its Cash App cohorts. This means that users who joined in 2017 generated more than twice as much gross profit in 2020 than they did in the year they signed up for the service.
The gross profit generated by users who signed up for Cash App in 2020 was huge. Although there are more users in the cohort (12 million), the absolute gross profit generated by new users was significantly higher than any other cohort in its first year. Management did not disclose the exact numbers, but noted that “the 2020 cohorts are ahead of the previous cohorts” in terms of the payback period for its marketing expenses.
Why has 2020 outperformed and can it maintain it?
There are several reasons why the 2020 Cash App Cohort produced such strong results.
First, the mid-year government stimulus led to many new registrations and direct deposit users. Square found that direct deposit users are generally more engaged and profitable than those who haven’t used direct deposit in the app: Cash Card users who also have direct deposits in the Cash App spend two to three. times more than other Cash Card users.
Square saw a sequential decline in gross profit per user in October and November, but it rose again in December after the announcement of a new round of stimulus checks. This benefit could continue throughout tax season, as Square has historically seen a similar response regarding tax refunds. However, it will be more difficult for the company to continue to adopt more and more direct deposit in the second half of the year.
The second reason is the expansion of the ecosystem. Square continues to roll out new features in the Cash app, and users are responding well to them. Management said its equity investing function was the fastest adopted feature in the history of the company. During this time, he saw an increased adoption of Bitcoin trading in recent months as the price of cryptocurrency has risen.
The more products Cash App users adopt, the more they engage in the suite of services and the more profitable they become for Square. The company will continue to roll out new features in 2021 and build more ways for each department to connect to others in the app. Last quarter, for example, the company introduced Boosts on its payment card that increased interest in Bitcoin and the establishment of direct deposits.
Focus on success
With the strength of its 2020 cohort, management plans to invest more in growing its user base through sales and marketing. Ahuja said the company will increase its operating expenses from $ 800 million to $ 900 million in 2021. This is an increase from forecast. she provided at the end of the third trimester. About 60% of these expenses are for the Cash application.
Importantly, Cash App has a customer acquisition cost of less than $ 5. With an annualized gross profit per user of $ 41, this is a huge opportunity for Square to build on and grow the user base. In its March investor update presentation, the company said Cash App has a total addressable market of $ 60 billion. With only $ 1.4 billion in revenue (excluding Bitcoin transactions) in 2020, the fintech company only penetrated around 2% of the market.
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