Disclosure: I am long shares of SQ
In 2012, Jack Dorsey, co-founder of Square, gave a talk to the employees at Square. He discussed the elegance of the Golden Gate Bridge and how design is at the heart of what he builds: “Design is not just visual, design is efficiency. Design is making something simple. Design is epic. Design is making it easy for a user to get from point A to point B.”
In the following year, Dorsey expanded further on his Golden Gate Bridge analogy in another talk at Stanford:
"It (the bridge) has enabled generations of end-users to get from point A to point B. They’re thinking about point B so much that the bridge just completely disappears…The goal is to make products and services that are just so intuitive that they simply just disappear into people's lives.”
What started as an elegant white, square shaped dongle for small merchants to accept payments from customers has today become ~$120 Bn market cap company in just a little more than a decade. While SQ’s products are yet to assimilate into our daily lives to the extent that it “disappears” into the background, that is the dream Dorsey is still chasing. Even Jamie Dimon, CEO of JP Morgan, not only praised how Square capitalized on the white space left out by big banks but also cautioned how JP Morgan should be “scared s***less” by the fintech threat.
I would like to acknowledge my gratitude to “BlueToothDDS” who was kind enough to discuss SQ with me and teach me some key aspects of the payments industry through long text messages on twitter. Without his/her pedagogical session, it would have been considerably more difficult for me to understand all the nuances related to payments and SQ.
Here’s the outline for this deep dive. Please note that Section 1-4 primarily discuss the narrative to understand SQ’s business and section 5 ties the narrative and the risks to the numbers:
Section 1 The Seller Ecosystem: This section includes the background story of SQ, early competition from Amazon and how SQ survived, SQ’s products for sellers, and the size of the opportunity.
Section 2 The Cash App: I discussed how Cash App was started, current use cases, revenue streams, competitive dynamics, and some of the blind spots of Cash App.
Section 3 Afterpay: A quasi-marketplace masquerading as BNPL: I elaborated on three questions in this section: a) How does BNPL/APT work? b) What is the competitive environment in BNPL? c) How does APT acquisition make sense in SQ’s long-term ambition?
Section 4 Regulatory arbitrage and potential headwind: I explained the Durbin amendment and why SQ and other fintech may face potential regulatory headwind in the future.
Section 5 Valuation and model assumptions: Implied expectations in the current stock price was discussed, tying the narrative discussed in earlier sections to the model assumptions.
Section 6 Management and incentives: I took closer look at Jack Dorsey and mentioned my opinion on him.
Section 7 Final words: Concluding remarks on SQ, and a very brief discussion on my overall portfolio.