Shares of Square Inc. (SQ), mobile point-of-sale (POS) and digital payments provider, were up 4.28% at close on Monday, marking a turnaround from last week when the stock had its worst single-day performance in more than a year. The stock saw gains of more than 150% in September, but share prices have cooled off thanks to the recent sell-off in the broader market. Is now the time to buy Square Inc.?
Shares may have fallen since reaching a peak of $99.01 on Sept. 24, 2018, but the stock has been on an overall upward trend since May 2017.
Square’s winning strategy and high demand for its product should help the stock continue its upward trend. Since launching, the company has expanded its offerings to increase its bottom line. Square attracts customers, mainly small businesses, by offering a simple POS system that works with its card readers.
Once merchants are on board with Square, the goal is to upsell to other services, like invoicing and payroll services. Square Capital provides business loans, its Cash App provides peer-to-peer payments, and Caviar provides a digital ordering system for restaurants. Revenue from these services were up more than 100% and accounted for 19% of the company's revenue in the third quarter.
These additional services may push Square forward towards generating a profit. The company has generally posted a loss on its bottom line, but has generated positive free cash flow. Management thus far has been focused on growth instead of profit, creating new products and services to expand Square’s customer base.
But Square does face competition. Financial firms Capital One Financial (COF) and Intuit (INTU, Financial) both offer card readers and other services for merchants. PayPal Holdings (PYPL, Financial) recently acquired iZettle, a POS system provider for small businesses in 11 countries, as part of a $2.2 billion deal.
Square may continue on its path of growth, but it will be competing with larger companies that have more resources and well-established relationships with merchants. The company also faces the challenge of being able to meet the needs of larger, more complex businesses, which the competition is better suited to serve.
Still, Square’s numbers are impressive. Larger merchants now account for 52% of the company’s gross payment volume. This indicates that as smaller businesses grow, they are sticking with Square to process their payments. Square Capital now has more than $400 million worth of loans, up 34%. Loans are a great source of growth, but they do come with a risk – particularly if another economic recession arises.
Overall, Square appears to be a good long-term investment, but prices may still be inflated and investors may want to wait until share prices fall further before buying shares.
Disclosure: The author does not own any stakes in the listed equities.
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