Stock Pitch: Square

Recommendation: Longing Square, Inc. (NYSE: SQ)
Industry/Sector: Financial Technology, Payment Processor
Price: $23.46 (Friday, June 30 close)
Target Price: $28.15

Industry Overview: Financial technology (fintech) is generally defined as any technology that is used or developed to improve the accessibility of banking and financial services. The industry has been a hot button market since the beginning of the new decade. Within the last 3-4 years, the space has caused many investors to raise an eyebrow and take notice of its ability to shake up the way we process payments, make investments, save money and more.

What fintech has been doing in this century is disrupting the way we interact and use financial institutions. On a very surface level and from the retail perspective, a financial institution, like a bank, is used as a place to make deposits, withdraw those deposits, make loans, and save for long-term goals. Companies like Robinhood, Acorns, Lending Club, Kabbage, and Square have provided consumers with new ways to manage their finances. Robinhood, which provides commission-free investing for all U.S. stocks and ETFs, has played an instrumental role in pushing traditional brokers to lower their prices. In February, both Fidelity Investments and Charles Schwab lowered their fees to $4.95/month in order to compete with the app’s free service.

Company Background: Whereas companies like Square have made it easier for small business owners to accept payments and even raise capital. Square was started just under a decade ago with the Company’s first product, the Square Reader, a device used to accept credit card payments when connected to a mobile device’s audio jack. Since then, Square has innovated their products to accept cards with chips, Apple Pay, and other EMV chip cards. In 2013, the Company launched Square Stand, which turns the Apple iPad into a full-service point-of-sale system. It allows merchants to collect payments using an iPad and enables customers to pay with their credit or debit cards and sign for their purchases. Other recent products include Square Capital (more on this later), which provides financing to small businesses, Caviar, which provides customers with a delivery service from local restaurants, and Square Payroll, which assists small business owners in processing payroll for their employees. Finally, just in the last few days, the Company announced that they will be launching prepaid debit cards, Square Cash Cards, that draw funds directly from your Square Cash accounts as opposed to your local bank. This means that customers won’t have to deposit their money into their bank and can instead use them directly at local businesses at their own convenience.

Company Strengths: Square serves as one of the disruptors in the payment processor industry, battling giants like Visa, MasterCard, and PayPal. While Visa and MasterCard struggled to respond effectively to the new EMV chip-embedded cards, Square has invested much of its resources in speeding up the transaction time for customers with chip cards. In the Company’s Q32016 Letter to Shareholders, Square announced that they had improved their average EMV transaction speed to 4.2 seconds from 5.7 seconds, an increase of 25%, while the industry average ranges from 8-13 seconds.

Coming back to Square Capital, which was designed to help small businesses expand their operations and increase revenue. The service provides loans to select existing Square customers who then pay back the loan as a percentage of business transactions. Since Square only provides financing to its own clients, it has mass amounts of data and can provide loans with the utmost discretion. In Q12017, Square Capital facilitated over 40,000 business loans totaling $251M, up 64% YoY*. Additionally, Square Capital has been able to maintain a 4% default rate, half of the national average for small business loans.

Lastly, there are very few companies within the payment processor sector that offer the full suite of products that Square does. Not only does Square provide the products mentioned above and many more, but they also announced the release of Build With Square in March of last year. This new product offers merchants secure end-to-end Point of Sale (POS) solutions that allow businesses to accept payments in a variety of different ways while also syncing with the client’s current software. The service also allows clients to track online and offline sales, inventory, and access data analytics among other features.

Company Weaknesses: While Square has in many ways lead innovation in this space, the Company does not come without its flaws. The biggest weakness of Square is its poorly-rated customer service. The Company received 2 out of 5 starts on consumer affairs while some of the reviews reference issues with Square Capital and others reference long-lasting fees that had allegedly already been paid off. If the Company wants to expand its business and attract more clients to its new innovative products, it will have to improve its customer support arm in order to scale growth.

Overall Takeaway for Investors: Square is undervalued at its current share price of $23.46 by roughly 15-20%. Although its customer support could stagnate future revenue growth, which may bring down its overall share value, the company still stands to have a target price at 10-12% greater than its current price. Square has done a great job differentiating itself from the competition while maintaining relevance. However, it will have to keep up with the likes of big players such as Visa and MasterCard and up and coming fintech companies like Venmo and Braintree as it grows and establishes itself as a big player in the industry. Ultimately, its product suite should outperform its competitions’ limited offerings.

Forward Looking Guidance: While this article did not cover Square’s international growth, it should be noted that the company recently launched in the United Kingdom in Q12017. The Company has an incredible opportunity for growth in emerging markets and can bring its small business minded brand to cash based economies like India, Nigeria, Mexico, and other emerging economies. Square’s presence would encourage these governments to increase their populations’ access to financial resources such as bank accounts and access to credit.

Final Recommendation: Longing Square, Inc. at a target price of $28.15 for an investment horizon of greater than 12 months. Investors should continuously monitor the company’s performance throughout as well as maintain a close eye on its competition.

*Pulled from the Company’s Q12017 Shareholders’ Letter 

Ali Punjani
Independent Business Blogger


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