After Caviar, Square Is Set To Refocus On What They Do Best

Square Inc SQ announced on Oct. 31 they would sell Caviar, the food delivery startup they bought in 2014 for a reported $90 million, to DoorDash for $410 million in cash and preferred DoorDash stock.

The acquisition seemed like a good buy at the time. In 2014, many consumers were excited about the prospect of ordering food from a variety of restaurants that didn’t normally offer delivery. And it was thought that Caviar would add another source of revenue to Square.

But fast forward five years, and we see a fiercely competitive market, with other food delivery platforms like Uber Technologies Inc’s UBER, Uber Eats, GrubHub Inc GRUB, DoorDash, and Postmates all on the scene. As more competition has entered the marketplace offering more choices and promotions, consumers are not showing loyalty to any particular food delivery app, instead using whatever service best fits their needs that day. The CEO of Grubhub recently referred to these “promiscuous” diners as a reason for the company’s slowing growth.

According to the Data Points research blog by Second Measure, in the third quarter of 2017 83% of GrubHub’s customers were only using GrubHub. Two years later, only 61% of its customers were using only GrubHub. This year Caviar had the lowest amount of exclusive customers at only 35%. This trend has heavily weighed on Caviar, and ultimately, Square.

So what do you do if an area of your business is not growing with the rest of the company? You fix it—or in this case, sell it. As share prices in the food delivery industry have dropped this year, Caviar was becoming an anchor for Square. For the third quarter of 2019, Square reported that its adjusted revenue had grown 40% year-over-year. But if you exclude Caviar, it would have been 43%.

For the third quarter, Square reported $500 million in gross profit, $364 million of which came from their Seller ecosystem. That is a 42% and 26% increase year over year, respectively. Given this nice profitable increase, Square is choosing to focus on the areas of its business that are working.

According to Square, about 80% of merchants that aren’t Square sellers are aware of Square, but only 9% know their products well. So they are investing in marketing campaigns to create awareness of their payments services and, more importantly, their tools that help businesses grow, such as loan offerings, a website builder, and payroll service through Cash App that allows them to pay their employees instantly. Put them all together and you have a nicely rounded out set of services to help businesses get started.

Along with this, Cash App is doing some pretty amazing things for Square. For instance, this quarter Square announced that Cash App users can not only spend, store, send money, and buy and sell bitcoin, but now they can trade stocks. Square reported during the third quarter Cash App’s total net revenue was $307 million. Excluding bitcoin, Cash App revenue was $159 million, up 115% year over year.

“If Cash App did not acquire another new customer, revenues would still grow from the existing base,” said Chief Financial Officer Amrita Auja. Basically, management is working Cash App into a platform where it can continue to add services and deepen relationships with existing customers, like the service to start investing.

Cash App has been a great added part of Square’s business, and the new trading feature may help it grow further. Not only will Cash App users be able to trade, but they’ll be able to do so using fractional shares, even as little as $1 worth. The service will also be commission-free.

Square has not yet explained how they will make money offering this service, though in keeping with other free trading apps they will most likely use payment for order flow. At any rate, it is another considerably noteworthy service they are introducing, and I am very interested in how it will play out.

All in all, I like that Square is getting focused on what it knows. Selling Caviar was the right move. Investing in marketing and expanding the tools and services on its current platforms may be just what Square needs to do to keep growing for investors.

Eric Martin is an investment advisor representative at Concinnus Financial. Some clients at Concinnus are long Square.