Square Inc: Are Triple Gains Ahead For SQ Stock?

Square IncWall Street analysts have different sentiments on Square Inc (NYSE:SQ), the payment processing company headed by Jack Dorsey, who is also the CEO of Twitter Inc (NYSE: TWTR).

Data from Yahoo! Finance showed that 11 out of 21 analysts recommended a “hold” rating on Square stock, while the remaining had “strong buy” or “buy” ratings as of this month. I concur with their sentiments that Dorsey’s payment processing company remains a good investment.

Square Second-Quarter Results Were Strong

Earlier this month, Square reported financial results for the second quarter that surpassed the expectations of Wall Street analysts. The payment processing company’s total revenue increased 54% to $438.53 million from $310 million in the same period a year ago. Its net loss was $0.08 per share, compared with $0.20 per share in the year-ago quarter. (Source: “Form 10-Q: Square, Inc.,” United States Securities and Exchange Commission, August. 4, 2016.)

Analysts expected Square to report a net loss of $0.11 per share on $405.71 million in revenue.

Square achieved positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $13.0 million in the second quarter, which represented a seven-point margin improvement year-over-year. Its gross payment volume increased 42% to $12.5 billion.

The company’s larger-seller gross payment volume (GPV) increased 61%, driven by multiple factors, including its products’ simplicity, cohesive system of services, and fast access to capital. Its software and data product revenue climbed 130% to $30 million and hardware revenue rose 209% to $11 million from the same period last year.

Square’s management believed that the company would continue to achieve strong growth and profitability. They expected the company to achieve total net revenue of around $410 million to $420 million in the third quarter and about $1.63 billion to $1.67 billion for the full fiscal year. They expected to generate an adjusted EBITDA of around $5.0 million to $6.0 million in the third quarter and about $18.0 million to $24.0 million in the full fiscal 2016. (Source: “Shareholder Letter,” Square Inc, August 3, 2016.)

Square is Winning the Competition

Square has been focused on offering its product and services to small businesses, but it is now attracting more interests from larger sellers as well as multi-location sellers. Take note that its GPV from larger sellers increased 61% in the second quarter.

During the company’s earning call with analysts at investors, Square CEO Jack Dorsey emphasized, “We’re winning a lot from the competition because of our core differentiators.” He also noted that the company’s products and services are thriving through word of mouth. People are learning that the company’s products and services work for every business: small, medium, or large.

According to Dorsey, they are using machine learning and data science to make sure that they know the possible questions that every type of seller would ask, so that they can be more effective and efficient during conversations with them.

Square’s Businesses Are Outperforming

Square Inc’s software and data products are outperforming (revenue up 130% to $30.0 million) and are achieving a very strong retention rate.

The company’s newly launched products, including “Scheduled Invoices,” “Recurring Invoices,” and “Card on File,” are becoming very popular among sellers and have opened a larger market opportunity for the company. Its invoices already have 140,000 active sellers, which represent a 122% growth since the second quarter last year.

“Square Capital,” the company’s financial services unit, extended loans to 34,000 businesses totaling $189 million, up by 123% year-over-year. The business is attracting more investors because of competitive advantage. It can offer loans proactively because its real-time payment and point-of-sale (POS) data provide a complete picture of the seller’s business.

Last week, the company signed a partnership agreement with Upserve to provide restaurant owners with fast, flexible, and straightforward access to funds through Square Capital. Upserve provides technology solutions for more than 7,000 restaurants managing 20 million meals a month. (Source: “Square Capital Provides More Businesses Access to Funding Through New Partnership With Upserve,” Square Inc, August 10, 2016)

The partnership provides a new revenue stream for Square, and it also paves the way for new opportunities for its restaurant delivery service known as “Caviar.”

Square’s hardware business (payment readers) is also growing exponentially. Take note that its revenue from that business soared 209% to $11.0 million in the second quarter.

Square Has No Problem with Technology Changes

When it comes to changes in technology, Square is ready. There are rumors that Apple Inc. (NASDAQ:AAPL) will no longer use a 3.5-mm headphone jack on the new “iPhone”. The change is not a problem for Square because its new payment reader is contactless and near field communications (NFC)-enabled, which allows buyers to just tap their phones to pay. Its new payment reader will support more devices in the future.  In fact, the company said sales of its new payment reader remain strong.

The Bottom Line for SQ Stock

The stock price of Square closed at $11.69 per share, up by 1.79% on Tuesday. SQ stock gained more than 17% over the past six months and more than 27% over the past three months.

The company’s businesses are outperforming and are expected to continue doing so over the next several quarters, which could propel SQ stock higher.

It is interesting to note that the company’s incremental costs related to Square Capital, Invoices, and Caviar are minimal, and offer higher gross margin than its payment processing business. Square stock could boost its gross margin from these businesses as it attracts more customers/sellers, which is very likely, given its new partnership with Upserve.

Some investors, such as Rizvi Traverse Management, are bullish on the stock. The private equity firm increased its stake in SQ stock to around 1.05 million shares from 44,000 shares, based on its latest regulatory filing. (Source: “Form 13F Information Table,” United States Securities and Exchange Commission, last accessed August 12, 2016.)

I believe that Square is on the right track to achieving strong growth and profitability.