Chit Chat Stocks - Square + Afterpay with Matt Cochrane

Episode Date: September 2, 2021

We are joined by long time friend Matt Cochrane, lead advisor at 7Investing. We discuss Square, including its acquisition of Afterpay. If you have not heard of it, Square is a financial services and digital payments company. Matt brings his expert knowledge of Square for a great discussion regarding the history and future of the company. Enjoy the show! Our Thursday Deep Dives are sponsored by Quartr, the new way of doing company research. Access conference calls, presentations, transcripts, and more for FREE on your mobile device. Download Quartr on the App Store here: https://apps.apple.com/us/app/quartr-investor-relations/id1552412128  Download Quartr on the Google Play Store here: https://play.google.com/store/apps/details?id=se.quartr.android  Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/aff/4/ Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Interested in more of Matt's work? Follow him on Twitter: https://twitter.com/Matt_Cochrane7?s=20 Rather watch us on video? Subscribe to our YouTube channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ  Contact us: [e-mail]  Timestamps Square | (4:50) Afterpay Acquisition | (26:49) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. Today's Thursday, September 2nd. Today, we have an interview with Matt Cochran, longtime guest of the show, sixth time on the show, I believe. And we talk about Square and Afterpay. But before we get to our interview, we got to talk about our sponsor, our friends, Quarter. I've been using the app almost, I want to say daily. I want to count myself as a daily active user. A daily conference call user. That might be a lot. You love conference calls that much. I'm a big weekly active user. I'd say it's great for the car or walks. You just plug it in. And if you're not familiar with what it is, basically a comprehensive investor relations app in your pocket. You can listen to conference calls. You can read presentations. I believe

there's transcripts on there as well. It's just great. It's a great way to digest all the conference call information. It's 100% free. They have companies from all over the world. You can favorite your companies, have a little watch list for yourself. And they have a bunch more stuff coming in the back half of the year. They sent us some of the updates. It looks really interesting. They're working really hard. Yeah. So download it now. Yeah. Get the team over there. It'll keep getting better over time. And it's a Q-U-A-R-T-R. So you can follow them on Twitter at Q-U-A-R-T-R underscore app, A-P-P. And that's quarter. Now, favorite parts from the interview. What did you like about this?

Yeah. So first, we kind of hop in quick. So maybe I'll give a quick description for anyone that doesn't know what Square and Afterpay are. We hop in quick. I know a lot of people know about it, but Square has two financial services products. They have a seller ecosystem, which is the point of sale, banking solution, loan solutions, and then payroll software and card solutions for merchants. So that's for business banking. We talk about that a lot. And then they are the owners of the Cash app, if you know what that app is. It's a consumer finance app for peer-to-peer payments, buying Bitcoin, buying stocks, getting direct deposits from your bank, spending money with their cash cards. They're trying to go after. They're almost trying to

be a neobanking going after the underbanked. And then Afterpay is an Australian buy now, pay later solution that they just bought. We described some of that throughout the interview, but we'll hop in quickly. So I wanted to explain that first. But my favorite part is probably the discussion about how the seller ecosystem was evolved. We haven't kept up on Square lately, but I remember thinking, you know, I kind of know this company pretty well, but he, Matt hit some interesting tidbits on the seller ecosystem that I did not know about. Um, and I think they're pretty cool. So yeah. And I would go my favorite part when we talk about tying the cash app into the seller ecosystem, we've been, or he has been right on some of those

assumptions before in the past on our show. Uh, and so when, when, when he talks about, I guess what the ecosystem in, in its entirety could be, uh, it's pretty interesting. Uh, but going to get to the show before we do new seven investing recommendations thought we'd plug this since we have a lead advisor coming on the show uh use our code ccm did you get a chance to look at the wrecks yet i did haven't read everything i read matt's um just because i wanted to you know read it before he came on the show with us but yeah if you if you think he you know was great on this interview check out the service because they have six other advisors like that plus other research. They have seven picks each month. They just dropped. It'll be yesterday when we're

recording this. The link will be in the show notes, code CCM. It's an awesome service. It's worth the money if you want extra research reports on a monthly basis. And it's for all different types of investors. It's pretty great. Okay. Without further ado, here you go. Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts, and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast.

Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guest is not formal advice or a recommendation. Now, please enjoy this episode. today we are welcomed by i believe still our podcast best friend uh this is what six times yeah he's competing with simon but we'll have one more yeah neck and neck with simon but yeah but uh it's matt cochran he's a lead advisor uh for seven investing how have things been i think it's been almost nine months since we spoke last so how's everything been and we're talking the day of oh sorry and we're talking the day of a new recommendation so this is good timing it is great

timing and yeah guys you know you talk about you throw around that term bff to your podcast and then you ghost me for nine months so i'm glad to be back always glad to be back yeah we'll have to uh we'll have to make it a quicker quicker turnaround this time definitely definitely all right well we're going to be talking about square and after pay today they just had that big merger. And you've been following Square for a long time, probably just since right around the IPO. And we'll cover Square itself, which is a company that people know a lot. We're going to talk a lot about the Afterpay Square merger and what the two companies look like combined. But let's get an update on Square first. Has your investment thesis changed at all for Square

since we last spoke in December 2020? So specific to Square, I really don't think the thesis has changed all that much. I think a lot of optionality was kind of built into my thesis for Square since the beginning. I think shareholders have just wanted to see incremental features and services added onto both the seller side and the cash app side with some kind of vision to bring those two sides of the business together. And the more overlap they have, the better. And with each incremental feature or service, just adding up, building a little more engagement with its user base and making both cash app and the seller side a little more sticky. And I think that's what we're seeing. And you just mentioned the seller side. So

I guess that's, Cash App's probably gotten the majority of the headlines, especially over the last year, especially since we're talking about after pay, which we'll talk about how that fits in. But do you still like the seller side of the business? And then if you were just buying that part, how much would you be willing to pay for it? So that's an interesting question. What I'll say One, the seller side, it definitely got less publicity during the pandemic. I mean, things were shut down. People were staying at home, but they were spending money digitally. So that was a great boon for the cash app side, and it was horrible for the seller side

because most of Square's merchants were on site, on location. But still, it grossed over $500 million in gross profits the last quarter. That was growing at 85% year over year. it's very sticky they're growing with their larger sellers it's going omni-channel uh which it had to do it during the pandemic you know that's like their card not present gross payment volume so that's things from like their uh their online channels and their e-commerce apis uh that grew 41 percent year over year and on a two-year growth basis it was up 28 percent uh and that's you know like i said that's driven primarily by their online channels so the seller side it's doing

great i think it's actually kind of like a a sneaky reopening play uh because like you should see a bounce but i think a lot of the gains seen on the cash app side will stay um so so i think the seller side is doing great i forget what was your the second how much would you pay for just that business independently so i i don't know what what i'll say though is this right that with square the whole is greater than the sum of its parts so like it's not like i think you can just take the square market cap. And if you're going to make these two separate businesses and divide the market cap by two, I don't know where that number is exactly. It might be thirds, actually, like where a third is just the synergies that you can get between the two. But like, what I'll say

is like, I just think with square, the whole is greater than the sum of its parts. What have they done on the banking side for sellers? Because I know they haven't been there. Maybe they're waiting or they haven't just decided to announce it yet, or they're not allowed to announce it on the consumer side for an actual bank, but they have done banking stuff, like a legit banking license for the sellers. How has that developed? How has that tying into the point of sale stuff and all that other, all those other services? Yeah, they opened up Square Banking. So they have like, now you can have as a business, you can have your banking, your checking account with Square, your saving account. They made Square Capital, which is their loans. I think now they

call it square loans and they tied all three of those together and you know uh for banking for the merchant side um and and look i think i think the first time i was ever on your show we were talking about square uh so we've talked about this for years and i think you know what we're talking about is like is square as an app it's just kind of going to replace like that uh the actual banks and and people's lives on the cash app side and businesses side like on the on the merchant side And I think you're just seeing more and more of that every quarter. Again, it's incremental. I don't know if you can point to like one magic thing, like, oh, that's the answer.

That's what they needed to do. But each little incremental thing they do, like so the square banking and having like businesses have their checking account with them, you know, after allowing businesses to have a business credit card and debit card with them, like things like that, every quarter, every year, you keep adding services like that and you're making your services more sticky. Have they done anything recently to tie, maybe we should have prefaced this more, but they basically break it in, break it out into two ecosystems.

If you're not familiar with Square, where there's the seller and then there's the cash app, which is the consumer facing. Have they done anything further to tie those two together? I think last time we spoke, they've been vague about like saying that's a, that's part of their roadmap, right? Yeah. So they have said that's part of the roadmap. And I think, and we're going to talk about more about this later with after pay, which I think was a huge move in that direction.

But like, besides that, one of the things that should be Square's overall goal, and which is, is to keep payment, is to keep money within the Square umbrella, to keep it within the Square ecosystem through transactions. So like if, Ryan, you own a cheeseburger food truck, right? And Brett works for you. And I go to that food truck and you have Square as your point of sale and I can pay with cash out. And so when I pay, that money stays within the Square ecosystem. Now you have Square payroll. And so I forget who I said owned the food truck and who was working there.

But like when you pay your employees, like the food truck owner pays his employees with Square payroll and they can pay it to the cash app. And so like when you have, and then from the cash app, you spend it like on that debit card with like their loyalty function at another Square seller. And the more you can keep it within the Square ecosystem, the higher margin transaction Square is going to have. So that's the goal, right? Now, that's a very, very small part of transactions now.

So first, let's acknowledge that they are far away from making that a big part of its business. But the more they can do that and move closer to that, the better it is for Square. And as you keep adding these things to make these two ecosystems overlap, and with things like the example I just gave, when that money can just slosh around within the Square ecosystem, moving from account to account, but they're all Square accounts, those are very high margin transactions for Square. So that should be their overarching goal. Do you think that gives them a competitive advantage versus competitors like Clover? I've seen that Clover has maybe in recent quarters been growing their payment volume faster.

But do you think in the long run, that full ecosystem of services will just be a better offering for their core users? So Clover's great. Clover's great. But yes, I do. And I also, and the only two companies that have this dynamic are PayPal and Square. And I think it's a huge advantage for both of those companies to be able to go to merchants and say, well, look, Square can say we have 40 million monthly active users on our cash app side, and we can drive these consumers to your business. There's plenty of features they can work into that.

And PayPal, of course, has a much larger consumer base. But those two companies to have both sides and to have that complete ecosystem is really big. And it is a differentiator. When you can go to a business and you're looking at, if you're opening a food truck or whatever the case is, and you're looking at Clover or Square between the two and you're comparing prices, you're comparing features and what you might want to have, if Square can say, well, we have 40 million and growing, but a 40 million cash app user base that we can drive to your business uh with different features like that's that's definitely a selling point

yeah i'm still waiting for the uh the localized boosts uh on the cash card because i know they have what 10 million users i'm one of them so i kind of uh they give me the 10 back off of the grocery store to really tie in there but do you think that could be something where they do localized uh cash back stuff for the cash app that specializes for the sellers and that's a selling point where either the local sellers who aren't the big chains that are doing it for them right now, like 7-Eleven, but the local sellers can either pay or it's just a feature to give them a better advantage to get the cash out of customers over there. Yeah, absolutely. And also it allows... So think about it this way. It also allows... Just keeping within the example of a

food truck. It also allows you as a food truck to build a, a customer loyalty program. Right. And so like after, if I go to Ryan's food truck and I buy my cheeseburger and French fries and diet Coke, like, uh, with, and I pay with my cash card or cash app, then Ryan as a business owner can send me a text saying, Hey, you earned like, I don't know, like five loyalty points with this visit. And if you, you know, when you get 20, you get a free cheeseburger meal. And so all you have to do, all I have to do is like, I can manage all my loyalty points within my cash app. So I don't have to download another app. So if Clover was going to do something similar to this, like, you know, however, if they could, if they could even do this, like you'd have to download a

separate app, like that's very valuable real estate on your phone. Nobody wants to download 500 apps on your phone. So it has to be important. But if I can manage like five different loyalty things within my cash app. And again, there's 40 million of these users out there. Then that makes it that much more attractive. So yes, I also want to see localized things. So if I don't know about Ryan's food truck, I want Square to find a way to direct consumers there. But once I do find it, Square has an incentive to bring back those consumers and not, like I said, like Clover, using that example, they do not have that. They don't have that same dynamic yeah it's interesting that that benefits all three stakeholders there it benefits

the merchant it benefits square and it benefits the consumer so that seems like just something that they're gonna have eventually absolutely yeah or go ahead ryan do you know so we talked a little bit about boost there do we know you know how those discounts get created is it basically just cash out dropping bitcoin back to the consumer or is there's only some of our bitcoin boost yeah it doesn't have to be bitcoin it doesn't have to be bitcoin yeah but it can be is whoever that merchant is paying so some of it's uh some of it's vanilla like grocery store or restaurant but some of it is with specific companies uh like doordash 7-eleven they do xbox and playstation stuff for those stores for games i don't know matt if you have anything else to add

there uh no like like i think you basically covered it but like yeah they they can do boost they can do it in cash or Bitcoin. I imagine it works like any other reward program. It's kind of built into the price. Right. And then let's hit the cash app, I guess, more deeply here because that's probably what a lot of people come to Square for. A lot of that's what they're known for now. So gross profit per cash app user has gone up two and a half times over the past two years. That's a really impressive number. Why did that happen? And then how can they grow that number again over the next three to five years? So in the past few years, they've introduced stock buying and selling on their app.

They've introduced cryptocurrency exchanges. Before that, they had introduced a cash card and boost, which we already talked about. And in the years ahead, to grow it further, they could definitely introduce other things. You know, I would love to see them like to build an acorn like autosave feature or something like that. But I think the real driver of growth is going to be direct deposits. Watch direct deposits. The more Square can convince its users to deposit money into the Cash App instead of a bank as their primary, quote-unquote, checking account, as your primary source of funds, the better it will be for Square. that's why the government disbursements were so big right it's not like that one transaction meant anything for square or cash up but now these consumers had money sitting in their cash up

account and then they're from there how they spend that money now some of them could have directed it right to the bank that's linked to their their cash app so a lot of them probably did do that but the more square can get money into these accounts um the more like square will will obviously make money for that, build engagement and everything else that comes with it. Now, look, I, like I said, I can, I expect them to continue building functions into, into the cash app, but the real driver is going to be deposits. So they, they need to convince people are consumers, cash app users to have money deposited into their cash app accounts. Where do they generate the most of their cash app revenue from? Like, is it when they transfer

back to their bank right now so i it comes from instant deposits like first of all that's still like a huge huge growth from them it comes from the cash card uh like another huge huge huge uh benefit from them uh the other things are are really just ways like the stock buying or the stock selling the cryptocurrency stuff like that's just all ways to drive engagement but like yeah their primary source of revenue is still going to be from instant deposit it's still going to going to be from like the cash card. That's like huge for them. Things like that. Primarily just spending money. Now it seems like peer-to-peer Venmo has really still stayed as the leader there. Cash App has really won in kind of the non-peer-to-peer consumer finance stuff for

younger people. Do you think that is a concern for the Cash App or is it fine? Because it seems like that's not, it's pretty hard to monetize those transactions. I think it's fine. I think it's inevitable there's never ever going to be a one winner take all in this kind of market right um so i mean like i'm a shareholder of both paypal and square and uh like you know i i don't expect any one of them to like really to dominate and crowd the other one out uh i think more importantly for cash app and demo and paypal like it is to keep others out like i think like a lot of digital banks are trying to like make similar type type of apps now um you still have zelle uh which is like a you know a thing that like a lot of the major banks are tied into but like i think so

like i think that's the main i don't think cash app has to worry about demo too much i don't think demo has to worry about cash app too much there's plenty of room for more than one major player in this space what are your thoughts on bitcoin uh i guess as a part of your investment i know So they added, I'm blanking on the number, they added some to the balance sheet. It's about 5%, yeah, 5%. I guess, what are just your overall thoughts on that as a component of the business? So as a cash app function, I think everything they can do to incorporate Bitcoin or other cryptocurrencies is great. Just drives engagement, right?

So that's fine. I know they have this open source project they're calling CBD, and I pasted the quote here. like making it easy to create non-custodial permissionless and decentralized financial services our primary focus is on bitcoin driven by our belief that bitcoin has massive potential to level the playing field for all like so like as far as like these open source projects like adding bitcoin to the balance sheet like five percent like it's not something i would have done all right like i'll say that but um at the same time like if jack dorsey believes it's going to be like a big thing then uh like i i don't mind i guess relatively minor bets like that on it um

you know i i they could pay off in a big way uh you know cryptocurrency keeps going up um but it's so volatile like i i have really no opinion of it i would say you know shares in square are kind of like uh an indirect way to gain exposure to like cryptocurrency like i'm not like i don't own any cryptocurrencies personally. So as an investor, I do, I do kind of like having some kind of exposure to it. And I like having like a business behind that exposure in case it just completely implodes. So like as a shareholder, I see that as a benefit, but as a business, I really don't have an opinion. Now, from a management standpoint, you know, Dorsey and the team have a long track record where, you know, this isn't some micro cap with no established, I don't know, they've done super

well. I mean, stocks just crushed the market. Their revenue has just exploded. But when he talks about stuff like Bitcoin's going to solve world peace and stuff like that, and he's making big claims, and it seems like that's where his number one focus is, is that a tiny bit of concern for shareholders? I know other people are probably thinking about that. And I wonder how you think about that. Maybe you already just said. I'll maybe make that a bit of an easier question because we don't want it to be like a polarizing topic because obviously it is. Is there a point where it might concern you too much involvement with Bitcoin? Is there a point where it becomes, I guess, too high of a risk?

Yeah. So what's that other company that like invested their entire balance sheet in Bitcoin? I forget. MicroStrategy. Yeah. Okay. So like if Square did something like that, that would concern me for sure. For sure.

Now, as far as Dorsey, look, I'll say this. I think this is okay to say. He's an eccentric guy. He has done some things over the years. He sent beard shavings to Azalea Banks so that Azalea Banks can make an amulet that wards off evil spirits. And I think it was to protect them from ISIS or something like that. So like this, it should not surprise anyone that if you're investing in Square that Dorsey might do some eccentric things. Like he's talked about like living in Africa and things like that, which I don't even think is like necessarily a bad idea. But I think like, look, this guy, he's eccentric. All right. He's not, I don't know what else to say about that. He's just like, he'll do different things. And I think in a weird way, like, I think like he's done extraordinary things in his life. So maybe you shouldn't expect him to be normal. Like, I don't know he's a guy, if I sat down and had a beer with, how much I would enjoy that personal

interaction. Of course, I would love to do it, but I don't think he could ever be just a guy you drink beer with and watch football. But that being said, he's not normal and he's done extraordinary things. So you have to expect some weird things or weird different takes from him. And that might be for the better of the company. I would say I've never built a company like Square. And I am very, very different than Jack Dorsey. So he's an eccentric guy, but he's done, I think, a phenomenal job being CEO of Square. Right. He's done some unexpected things, but it's worked out fantastic so far. We'll ask a question before we hit the advertising break and then talk about Afterpay. And this is another eccentric thing, and it might not matter at all,

but what do you think about the title acquisition? Were you for or against it? So, all right. I would say it's $300 million, which is a mix of stock and cash, right? For Tidal. So I'm mostly indifferent. Is that how, if Dorsey had asked me, like, should we spend this money on Tidal? I would have said no. Okay. But that being said, it's a relatively minor investment. They can probably use it to reach like the hip hop fan base to advertise Cash App and promote Cash App, and possibly make it a platform to drive entrepreneurship with musicians and artists. So if that's the plan with it, I really don't mind. Square's market cap is over $100 billion now, right? So like $300 million, it's a really, really, really small deal for Square. I think it

got more attention because of like title and the people associated with it and everything like that. I don't think it's that big of a deal. I don't think it's thesis changing and it could even turn out to be a good deal. Like if they can use that like as a real way to like make it a platform, like I said, to drive entrepreneurship and sales with artists. Yeah. It seems like it could be, I guess I don't know title very well, but it seems like it could be a good customer acquisition tool possibly for the cash app. I'm not sure how that would work, but. We'll see. Well, like always the investors kind of like us are like, yeah, this makes no sense, but sometimes Dorsey kind of pulls the rabbit out of the hat and you're

like, Oh, okay. Hindsight. That was a really genius move. Yeah. Like I want to, I want, I think Dorsey has earned the benefit of the doubt as a shareholder. He has earned the benefit of the doubt with me. This is, if it doesn't work out as $300 million, there's, there's, there's worse sins. You know, I guess when you go through, like when you're looking at the CEOs of your companies that they misspent $300 million when they thought it could do X and Y, you know,

and it didn't work out that way. So at the end, and like I said, it's not even all cash. It's also stock, you know, and I, I don't think they broke it down how much of it was stock or how much of it was cash, but like, you know, a $300 million deal when it's a mix of stock and cash, like, uh, I don't think it's the end of the world if it doesn't work out. Okay. We're going to have a quick break and then we are going to talk a little more after pay focus questions on the back half. this episode is brought to you by La Quinta by Wyndham here you are miles from home and ready to start your vacation good thing you're staying at La Quinta by Wyndham they have free high-speed

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And now all your computer can play is Red color, red color, where are you? all blocked thanks to advanced security included with cox panoramic wi-fi advanced security must be enabled in the panoramic wi-fi app restrictions apply all right welcome back in uh and so i guess it's maybe a month past when this deal happened uh was announced it was announced and this was them acquiring afterpay uh in an all-stock deal so can you kind of explain afterpay's business

model for anyone that doesn't know? And then maybe what makes them different from a typical buy now, pay later provider? Right. So, right. It was an all stock deal. It valued at approximately $29 billion. Another way to look at that though, because it was an all stock deal is to basically to say like Square, like gave up 20% of its company for after pay. So if you think the acquisition was expensive, which I kind of did. I thought the price was very expensive, but I also think maybe Square's stock right now is highly valued. It definitely goes for a premium. So I think giving up 20, it just mentally, it helps me to accept the deal more to say, well, is Afterpay worth 20% of the company? And I think it might be. It's based in Australia.

Afterpay is a pioneer in the BNPL, the buy now, pay later space. It offers interest-free payments that don't require a credit history check. The deal should close early next year. And it enables Square to integrate Afterpay into its existing seller and cash app businesses, allowing even small merchants to offer buy now, pay later at checkout and give Afterpay consumers the ability to manage their installing payments directly in the cash app. About 50% of Afterpay's gross merchandise volume originates in Australia, the United Kingdom. So there's some nice complementary geographic expansion for Square there.

And Afterpay comes with a $16 million consumer base and 100,000 merchants. So Square can substantially add to its seller and cash app user bases with the deal. So do you know, or did they, I know they had that very pretty slide deck of, I guess. synergies the venn diagram was very synergies guys it's gonna work yeah yeah do you know how the app will how this would play out will it be just become a part of the cash app and like the after pay app will cease to exist or so i think that is to be determined okay um i don't think i've seen anything concrete at least as far as that goes now what's interesting about this guys An underappreciated aspect of Afterpay is its tools for brand discovery and loyalty.

So we're talking about how to drive cash app engagement to square sellers. And I think this acquisition will push a lot of that together. Afterpay has a shop directory, which is an in-app directory that lists all Afterpay merchants. And in 2020, last year, it introduced a recommended tab. And those are recommendations for brands and retailers that are highly personalized based on a consumer's purchase history. And earlier this year, Afterpay launched a tab called Favorites, which is a way consumers can save products and retailers that they like and want to track. So if you see a product, but you don't buy it right away, you can save it for later in your Favorites tab and a Recommended tab. So if it knows that I liked Ryan's food truck when I was visiting Seattle and I come back home and Brett moved to South Florida and he opened up a cheeseburger food truck or a cheeseburger restaurant, it could recommend like that to me.

So I think this is like I think this is an underappreciated aspect of it, because if you imagine now you introduce these discovery and loyalty tools to cash apps like 40 million monthly active users. that's a great way to like increase cash app engagement and advertise square sellers so the direct benefits of increasing cash app engagement and payment volume for sellers are apparent but increasing those number of transactions that we talked about between square sellers and cash app users will all could could also significantly boost uh squares margins do you think it'll get and i don't even know if this is necessarily how it works with bnpl but do you think it will get some of the merchants to go exclusive with afterpay since there's such a big customer base within the cash app or do they tend to offer like a whole suite of buy now pay later offerings

do you know all right say that again do merchants offer a whole bunch of bnpl solutions or do they go exclusive with one provider and if they do does it give them incentive to go with afterpay now so i believe you mostly go with like uh an exclusive seller like you make a deal like peloton made a deal with a firm and like a firm is their buy now pay later solution i i will say i i think if you when you get to the really large merchants like amazon like i know amazon has a buy now pay later in-house option like i've seen that and i also know they made a deal with a firm recently um which may be like uh if you don't have like the amazon prime credit card where they offer that buy now, pay later option. Maybe those are for Amazon shoppers that don't have that credit

card or something like that. So I think when you get to these large words, you might see an in-house solution and a partnership with a third party BNPL provider. But also the thing with buy now, pay later, it's really like a feature that's now just getting embedded everywhere. I mean, most bank credit cards have it. PayPal has it, and it's grown phenomenally with PayPal, but American Express has it, like Citibank has it with their credit cards. It's just become a feature. So if I have a credit card where I know it's offered and I go to buy a Peloton, I mean, that's an extreme example, I guess, but I could decide to do it with my credit card or see if I see it with a firm at checkout, I could go with that, but you could go either way.

Right. So the basics that someone looks at this and they say, okay, Square, their merchants and users for the cash app are going to help after pay grow. Is there anything else that people are missing besides those two basic points? Or is that really the rationale for the merger? I think, well, I would also go back to the geography expansion. I think this helps Square a lot in a specific specifically australia and uk where they already have a presence so i think like um i think that's a that's also a really nice complementary part to it um but and now to have like a buy now pay later function in catch up it came out of price it came out of price guys like they didn't build it into in-house like paypal did it came at a hefty price but now you do have

that feature you can introduce in catch up so we're talking about like just adding these incremental features that make their platform a little more sticky and a little more to drive engagement. So now there's going to be Cash App users now that you can offer that option who might use Cash App more, who will use Cash App more. So it does do all those other things that we talked about. And it directly adds, like I said, it comes with 16 million consumers. So if those become 16 million Cash App users. I mean, you're growing Cash App, what, 40% overnight almost. And 100,000 merchants, if Square can add them to their seller ecosystem, now that's going to be a bit more tricky because most of those will already have point-of-sale solutions. But it gives you a step

inside the door anyway to talk to them about switching to Square. So I think it has obvious expansion geographically, Cash App users and seller side. It has obvious expansion numbers there. Drives engagement, but I think underappreciated, like I said, I think it will help drive that merchant to consumer sides, that overlap. Before we get to, Brett has a few, I guess, credit-oriented questions, but before we get to that, as an investor in Square, would you have preferred to see this, just have them come up with a BNPL solution in-house, or do you like the acquisition given all the other benefits that Afterpay provides? that's a great question i don't know yet like that it's something like it's riskier this way

i mean they diluted their shareholder base by by about 20 so was is that worth it that's a steep price to pay paypal did a phenomenal job building it out like phenomenal job like they built it from nothing it cost them about 50 million dollars i think uh they said in a conference call to build it out they said they explored the option of buying a bnpl provider and there's like and they just basically concluded like whoa we can we can do this way cheaper and we'll just distribute it to our members and it has grown phenomenally uh so i get paypal a lot of credit for that at the same time like i i wonder like if square thought they missed the boat on it and like they would have to build it and that's going to take time and that this is a feature that one that if

if it's sticky. So once somebody is on after pay, they're not going to switch over. And I can see the argument going either way. And it's just going to be one of those things. Time will tell. Time will tell. And we'll see how it goes. Yeah. In three years, you can get us to answer it. Right. Yeah, absolutely. Absolutely. All right. One thing people or investors are going to look at after pay, and they're going to look at that cashflow statement. And something that's going to stand out is the accounts receivable. It seems like they have a perpetual high level of accounts receivable. That's kind of a part of the buy now pay later model. Do you think that presents a concern for not only Square, but maybe just, you know, the buy now pay later model in general for

the ability to generate cashflow or is that just because they're growing quickly? It's probably a little bit of both. Like what, so what I'll say is like a great advantage for like, it's almost the opposite of float, right? So like insurance companies and like paycheck providers, payroll providers, providers like ADP, they get paid first and then they have this money that they don't have to spend right away. And that's called float and they can invest that float. And that's like, that can be a significant line item for their bottom line, like significant contributor to their bottom line. And it's almost like the opposite of float where, you know, consumers have a product and money's going out and they haven't paid it yet. That being said, it's very

short term, right? So like PayPal has talked about this, given a little color as they build out their buy now pay later solution. And they're saying it's really almost like a debit transaction that you just extend it. Like I think all, you know, the payments are made within six weeks, six to eight weeks. So I don't think it's a big deal. It's not a really a concern of mine, but it's a slight headwind. I'll call it, that's what I'd call it, a slight headwind. Okay. And then with the addition of afterpaying Square Capital, how do you and how should you think investors should be thinking about Square, about credit and loan risks? They're moving fast. They're really growing quickly. Is that a risk or can

that be an advantage with their scale? Oh, it could be both, right? I mean, the bulk case would definitely be as an advantage. You are now offering a financial service to your merchants and consumers, depending on which side you're talking about. But that's going to make them want to come to you. I think square loans, I always want to say square capital because that's what it was called for so long. I think that was a huge driver for its business for years. And I think businesses, especially small businesses, access to capital is crucial. So they were offering a service that was to a market where it was hard to get that service. And so offering capital to the sellers was like a huge driver for its business. Does that

come with credit risk? Yeah, it does. Now, that being said, there's things I like about Square Capital that are better than just like a business loan from a bank. One, Square has access on all their transactions, right? Like if you're using Square as your point of sale, they know how much business you're doing. And especially if you're using Square for payroll and all these other things, they can get a real good idea on what the economics are for your business. And if you're growing or if that's decreasing, things like that. And once you take out a square capital loan as a business, so now Ryan wants to open up another cheeseburger food truck, right? Because his first one is so successful. So he needs a loan. I have no idea how much a food truck costs, but he needs

a loan for it. And Square C's economics are like, well, no, it's done great. So we're going to give you that loan. Well, now when I come back to his original cheeseburger truck and pay with my credit card, they automatically take out a percentage of that for Square Capital's loans. So it's not like at the end of the month, Ryan has all these bills to pay. And he's like, well, and maybe it's hard to make things work exactly because it was a tough month or the pandemic came or the Delta variance in it and reduce foot flow. The payments for his loan automatically came out of the payments he took in as a business. So Square doesn't have to worry about a business owner saying, I'm not going to pay these loans. They literally have to shut the doors to not pay

Square back. That can happen, but it's also, I think it's less of a risk because of that model. Inherent in the model, I think it's less of a risk. That being said, yeah, it's still a credit risk. So sure. Like anytime you lend out money, there's a credit risk there. And I think like, take the pandemic. I mean, an awesome example. Like, I don't think that was built into any of Square's lending models. Like when they were lending money to businesses, like at WRA 2020, if Square lends Ryan money to open up another food truck and the pandemic hits, nobody's going out for several months now to buy cheeseburgers at the park. so it's always a risk but at the same time it was a been a huge driver for its business for

for several years okay last question i believe unless we have any more uh you talked about or i think we came to the conclusion that we will know uh if this was a good acquisition within three years so what needs to go right for square to for it to have warranted the 29 billion dollar price tag? It has to direct cash app consumers to Square sellers. That's what you want to see. And for this acquisition to be worth it, I think it really has to drive engagement of cash app users to Square sellers. Again, going back to those higher margin transactions, as long as money stays within the Square ecosystem or Square umbrella, that can really significantly boost squares margins. So if it can do that, I think it was worth it. And I think it's going to be

great for it. If it doesn't do that, if they can't, if they can't integrate these tools into the cash app with success, they're going to have a hard time. What financial measures are you going to look at? Is it, you know, kind of maybe an acceleration in gross profit growth as an indicator that that's working? Yeah, no, I think, I think it'll be evident. You want to see their take rate go up you want to see like things like that go up and they'll be talking about it like when they you you would expect them to be talking about it like hey we integrated this into the cash they might call it something different for rebranding but you know as long as there's like discovery tools and things like that and you should see it work you should see their take

rate increase you should see you know they grow gross profit by 80 year over year for the next three years it worked right it worked um so as long as you see that engagement go up as long as you see like those margins go up, like then it'll be, it'll be worth it. Okay. Well, I think that's going to do it. So I'm going to go ahead or I guess before we sign off, where can people find you? And this is a good time to plug our code CCM for 7investing. Go check out Matt's new recommendation. Yeah. Just perfect timing. Just came out. Yeah, absolutely. So yeah, I'm a lead advisor at 7investing.com where we release monthly recommendations and definitely use Ryan and Brett's code is a CCM guys. So become a subscriber, uh, use the code CCM,

get a little off your first month. And you can always find me on Twitter. I'm on there way too much. So if you like DM me or like leave a comment on one of my, my tweets, like I'll probably respond too quickly. And you'll probably be like, wow, I can't believe I caught him when he's on it, but it's actually, it's not a feat. I'm on it way too much, but it's at Matt underscore Cochran seven and I'm like, so Twitter or we're seven investing.com. Perfect. All right. We are not financial advisors. So anything we say or discuss here on chit chat money is not formal advice or recommendation. We are however, general partners at Arch Capital. So clients may have positions in the securities discussed on this podcast. Thank you guys for listening. We'll see you next time.

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