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Bull Of The Day: Square (SQ)

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The financial world has been evolving with the technological revolution finding its way into every crevice of the economy. The world is digitalizing, and the paper cash economy we once knew is becoming antiquated. Millennials and Gen Z’s don’t carry cash anymore with the use of cards and smartphones becoming the preferred payment methods. Square (SQ - Free Report) has been able to capitalize on the evolving financial world with its innovative payment process technology.

SQ has driven substantial returns since its IPO in late 2015 to its all-time high last September, illustrating 670% gains in that time frame. Since its high in 2018, SQ has stumbled a bit.

Square, Inc. Price, Consensus and EPS Surprise

Square, Inc. Price, Consensus and EPS Surprise

Square, Inc. price-consensus-eps-surprise-chart | Square, Inc. Quote

Square’s 2nd quarter earnings release disappointed the market, and the stock has since broken down over 24%. The firm beat both top and bottom-line estimates but dropped its forward-looking guidance. For a firm with high double-digit growth priced in and rich multiples, a slide in guidance incites anxiety for shareholders.

The drop in market sentiment may have created a springboard for SQ to rally off of in its Q3 earnings, which are expected next Wednesday, November 6th.

The Business

A survey conducted by TSYS, a payment processing service, found that only 14% of the 1,222 people surveyed preferred to use cash while the other 86% preferred either a debit or credit card. Square is a driving force in the fintech revolution pushing paper money out and digital finance in. The firm's primary product offering is payment processing support for small businesses, which would previously not have had the capability.

Most of you have likely used Square at your local main street businesses, recognized for its sleek hardware design being either a small square plug-in on a smartphone or a glossy white chip insert block. Square's hardware, combined with its cloud-based software allows any business to accept digital payments.

The Opportunity

Square has adopted a peer-to-peer (P2P) payment app called Cash App. This application is competing in this overly competitive market with PayPal's (PYPL - Free Report) Venmo, Apple Cash, and Zelle, which was started by some of the largest US banks, including Bank of America (BAC - Free Report) , JP Morgan Chase (JPM - Free Report) , and Wells Fargo (WFC - Free Report) .

Square's Cash App will now allow users to trade stocks with zero added commissions or fees. A unique characteristic to Cash App's new trading feature is its ability to allow individuals to buy fractions of shares of expensive stocks like Amazon (AMZN - Free Report) or Berkshire Hathaway Class A shares, which would have otherwise been unattainable to small investors.

Fractional trading is going to revolutionize the world of trading, and Square is an early adopter. This should expand the usage of Cash App and could provide them with expanded market share. The competition in P2P platforms is fierce, but this new feature should give Square a niche competitive edge.

Square has been building out its subscription-based business model that has been yielding the company the substantial margins and exponentially growing its topline with reliable revenue.

The firm's purchase of Weebly ($365 million in cash and stock mix) last year has broadened Square's reoccurring revenue stream. Weebly is a tech company that gives businesses the necessary tools to build out an e-commerce platform and helps the business manage it. Weebly and Square have an overlapping customer base, which should provide significant synergies for the combined company.

SQ has been building out its business fast with high double-digit topline growth and its ability to be cash-flow positive for the past 2 years. SQ has a proven business model, and its business is only expected to expand. This year analysts are projecting 35% sales growth, followed by 25% the following year.

Square is now opening its business to CBD merchants, creating an enormous market opportunity for this small business propelling enterprise. Once marijuana is federally legalized, Square will be well-positioned to take on the enormous payment demands that these merchants require. I think that current estimates are not taking the potential of the cannabis market into account. This new wave of retail could drive enormous growth for Square.

Analysts are increasingly optimistic about Square’s future profitability propelling these shares into a Zacks Rank #1 (Strong Buy).

Take Away

Square is becoming a well-diversified fintech firm that has its hand in a lot of different pockets. The stock's recent fall has created a buying opportunity for this revolutionary financial stock. SQ is positioned at a discount following a disappointing Q2, but with lowered expectations, this stock has the chance to see a big bounce following its Q3 report Wednesday, November 6th.

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