3 Big Areas of Investment for Square in 2018

A person using a Square Stand point of sale system.

Square (NYSE: SQ) stock is off to a strong start in 2018. The company's fourth-quarter results showed an acceleration in adjusted revenue for the fourth consecutive quarter, and the company beat the analyst consensus on both the top and bottom lines. CFO Sarah Friar said Square is entering 2018 on its front foot after posting excellent results throughout 2017.

But there's still a lot of room for Square to grow. The company sees a total addressable market of $3 trillion in the U.S. alone. For reference, gross payment volume on Square's platform totaled just over $65 billion in 2017. That's why the company will continue to invest in its growth.

Here are the three main areas of investment for Square in 2018.

A person using a Square Stand point of sale system.

Image source: Square.


In today's environment, commerce doesn't just take place inside stores. Merchants need to be everywhere -- desktop, mobile, and in stores -- and all of those channels need to work together. To that end, Square has several products that help it meet its goal of making sure a merchant never misses a sale.

Square's Appointments product helps services businesses set up an online appointment booking system. Square recently integrated its point-of-sale system with Appointments, making it easier to tie customers' booking appointments to sales in store. Investors should look for further integrations of online and in-store products like this.

Square is also investing in Caviar, its restaurant food delivery service. It recently expanded to allow customers to pick up food from its restaurant partners, giving its customers more options. During theearnings call CEO Jack Dorsey said he can see Caviar expanding to dine-in customers who want to order ahead.

Importantly, Square's omnichannel transactions carry a higher take rate than standard card-present transactions. That means the investments it's making now will pay off in a higher gross margin in the future.

Financial services

Square Capital was Square's first big success outside of payment processing. And it's still an integral part of its software and services segment. Square Capital loan originations increased 95% year over year in 2017, but that rate slowed to just 23% in the fourth quarter.

CFO Sarah Friar noted there are several areas where Square can keep growing Square Capital. It can offer larger loans to its growing base of large merchants. She pointed out, however, that larger merchants have very different needs from micro-merchants, which could make the loans riskier. Therefore, understanding risk based on Square's unique data is key to success on that avenue.

Another area of financial services growth in 2018 will come from the Cash App. The peer-to-peer payments app grew quickly in 2017 , ending the year with 7 million monthly users. Square has added several important services to Cash App, including the ability to accept direct deposits, use a debit card to spend down the balance, and buy and sell bitcoin.

The consumer-facing financial services are still in their infancy, and there's lots of room to expand. Square could offer consumer loans using the data from Cash App users. It could enable merchants to pay employees through Cash App. And Jack Dorsey says it's just getting started with bitcoin.


Square is currently available in just four other countries outside the United States. While the company doesn't plan to expand to more countries this year, it's going to focus on strengthening its position in the foreign countries in which it does operate.

Australia is a relatively new market for Square, and it just released its first big piece of hardware to the region -- Square Stand. That presents an opportunity to increase the visibility of Square in the market and drive more product awareness.

Square has been in Canada for a long time, but it only recently gained access to the Interac payments network. Interac accounts for about 50% of card payments in the country. That presents an opportunity for Square to go back to merchants with a better story and drive marketing efficiency.

In both Canada and Japan, there's still room to add to the product as it has in the United States. Square's domestic operations basically lay out a road map for how Square can succeed in those markets; it just has to deal with a different set of regulations.

Square expanded into the U.K. last year, but it hasn't made that much progress. The country, however, still presents a big opportunity for Square, as about 99% of businesses are categorized as small businesses and many don't yet take card payments. Square will have to invest more in marketing to drive growth in the region.

Keeping margins expanding

Square plans to invest in all these areas and produce revenue growth of about 34% for the full year. But these investments won't curb its profit margin. Friar provided an outlook for 19% adjusted EBITDA margin for 2018, up five percentage points from 2017. That's in line with previous commentary from Friar that EBITDA margin should expand by mid-single digits each year.

Square seems to be balancing its investments for growth with its profitability well, and investors should expect that to continue in 2018.

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Adam Levy has no position in any of the stocks mentioned. The Motley Fool owns shares of Square. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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