Square's Stock Price Fall Could Increase Its Investment Appeal

The company's strategy has the potential to boost its financial performance

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Square Inc. (SQ, Financial)'s evolving strategy could catalyze its stock price growth. The company is building a large user base through its Cash App, seeking to move into international markets. The cross-selling potential of products such as lending and stock-trading services could diversify and improve its financial performance.

A focus on individuals who currently do not have bank accounts could provide the company with a competitive advantage. Similarly, its expansion into lending services for businesses may lead to an increasing proportion of larger, more profitable customers.

Although the departure of the company’s CFO may have contributed to recent stock price volatility, a lower market value could improve its investment appeal.

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Larger focus

Square’s financial prospects could be boosted by its increasing focus on larger customers. While the company has been successful in providing a suite of solutions to small businesses, ultimately it is a difficult market in which to generate high margins. For instance, it requires a large sales staff to attract and onboard new customers.

Larger customers are defined as those entities that have over $500,000 in annual gross payment volume. Over the last two years, the company has increased the proportion of its total sales from such sellers from to 22% from 15%. This has contributed to a rise in quarterly adjusted Ebitda from $36 million to $68 million over the last year, with larger customers offering higher profit margins.

One strategy to increase the number of larger customers is the provision of its Square Installments product. This provides businesses with financing opportunities so that they can offer their customers payment plans for up to 12 months on transactions of no more than $10,000. The idea is to help make businesses more competitive relative to their multinational peers, which could lead to higher transaction volumes for Square.

Cash App

The company’s Cash App has become increasingly popular, with the peer-to-peer payment app reaching 33.5 million downloads by the end of July 2018. This has prompted it to launch the app in international markets such as the U.K., with the addition of a number of features likely to continue to increase its popularity among users. For example, the Cash Card debit card launched in summer 2017, and has contributed to a trebling of customer spending within the app in the first six months of 2018. Flexibility, which includes the use of bitcoin and a rewards program, have also increased the number of Cash App users.

An increasing number of people within the company’s ecosystem opens up a range of monetization options. The company is contemplating the launch of products such as savings and stock-trading services. Opportunities for customers to lend the spare cash they have within the Cash App could be ahead, with the company already offering a lending service to its payment-processing customers. Similarly, increasing amounts of customer data could be used for digital advertising or consumer loans. With there being 30 million underbanked people in the U.S., the company may be able to access a market segment that has a relatively low level of competition.

Management changes

One risk facing Square is the recent departure of its CFO, Sarah Friar. She has left the company to become CEO of social media business Nextdoor. Her departure is surprising, given that the company is at a relatively early stage of its growth plans, with her stating recently that Square is seeking to invest in areas that can have a material financial impact over the next two to three years. Having guided the company through the successful launch of a number of key products, such as the Square Reader and the Cash App, she has been a key part of the company’s growth in recent years.

Although the loss of a key management figure could cause a degree of disruption for the business in the short run, the recent Square stock price fall may factor in the potential risk facing the business. Its stock price is down 22% since the start of October. While a wider fall in stock prices may be partly responsible for the decline, the recent pullback in the company’s market value could present a buying opportunity.

Outlook

An increasing focus on larger customers could provide a catalyst for Square’s financial performance. Its Cash App has the potential to offer monetization opportunities such as lending and stock-trading services. With the company expanding its products and services internationally, its income stream may also become increasingly diversified.

There is a risk that further stock price volatility may be ahead following the departure of its CFO. Following its decline in market value, though, its investing appeal seems to have increased. The opportunity to develop a growing ecosystem of users which provides cross-selling opportunities could allow it to outperform the S&P 500.