The Sky’s the Limit for This Payments Processor
Today’s stock is a good example of one of my favorite methods of stock selection—investing in the “toll booths.” These are the companies that charge a small fee across a large base of users, which means that their stocks continue to gain as the businesses continue to grow. The toll-booth strategy helps investors make the most of emerging technology trends and increases the chances of triple-digit gains.
One of the best examples of this strategy is Square Inc (NYSE:SQ), a company that has grown by selling card readers and other payment services to small and medium-sized businesses (SMBs). Its innovative products give SMBs access to the tools and resources that are utilized by big businesses. The digital payments sector is one of the most happening things right now, and Square stock is one of the best ways to play this trend.
I am bullish on SQ stock for the following reasons.
Square Inc is levered to the booming digital payments landscape. The commerce ecosystem built by the company, in a short span of time, is hard to replicate. With Square’s sophisticated software and affordable hardware, small-business owners can start processing their card payments in a matter of minutes. The “Square Reader” makes it very easy for small-business owners to accept card payments through a smartphone or a tablet. It can process transactions made through chip cards or mobile payments made through apps like “Apple Pay,” “Android Pay,” or “Samsung Pay.”
As per the recent report by Forrester Research, Inc. (NASDAQ:FORR), the overall mobile payments sector will grow at a 20.3% compound annual growth rate through 2021. The volume of mobile payments in the U.S. is expected to reach $282.0 billion by 2021. The report further notes that the popularity of mobile payments will keep on increasing. (Source: “Mobile payments volume in US will triple by 2021: report,” Retail Dive, February 6, 2017.)
As the usage of card and mobile payments keeps growing, services provided by Square will attract more demand. Moreover, the focus on innovation will further sharpen Square Inc’s competitive edge. In the complex card processing ecosystem, Square serves as the payment service provider that acts as the touch point for sellers to interact with the rest of the payment chain. And to facilitate the transactions, Square charges a small fee per transaction.
Not just providing products and services, Square is also building a great platform where small businesses can customize their business solutions. It may appear to be a small advantage right now but, going forward, this means that these businesses are totally engaged with the Square ecosystem. This engagement can only get better with time, which means more growth for SQ stock.
The icing on the cake is that global growth prospects look pretty attractive for the company. The company has ventured into the U.K. market now after getting into Australia, Canada, and Japan. As the company makes inroads into more European countries, Square stock investors will gain further.
As the following chart shows, Square stock has gained about 70% year-to-date and is up more than 140% over the last year. The revenues have been going up with improvements in margins, as well as with market share.
Chart courtesy of StockCharts.com
The payments processor has been reporting strong growth over the past few quarters. The company reported an increase of 33% year-over-year in its gross payment volume, which touched $13.6 billion. The business is on a roll, and this is reflected in the way SQ stock has gone through the roof in recent times. The upbeat first-quarter results sent SQ stock flying high. Although Square stock may look a bit expensive right now, the scope for business growth is tremendous.
The Bottom Line on Square Stock
Square stock is a “toll booth” investment that could reward its investors handsomely in the coming years as the switch toward digital payments becomes more pronounced. The company not only has innovative products and services, but also has a great platform that can be used by businesses to develop their own solutions.
SQ stock has been going up consistently as more businesses get hitched to the Square platform. With a focus on innovative payments solutions and a differentiated platform, investors could gain from this trend by investing in this toll booth stock.