4 Reasons I'm Thinking of Buying Square Inc.
Shares of Square (NYSE: SQ) recently tumbled after the payments solution provider posted its first quarter numbers. That decline likely surprised investors, since Square easily beat analyst expectations and raised its second quarter guidance.
I've been keeping an eye on Square over the past year, but the stock always seemed too hot to handle. It quintupled since its IPO in late 2015, and it rallied more than 150% over the past 12 months, easily crushing the S&P 500's 10% gain.
Square Register. Image source: Square.
But with the stock pulling back after its first quarter report, I'm considering starting a position in Square for four simple reasons.
1. A disruptive, growing business
Square's core business is aimed at disrupting the traditional POS (point of sale) systems market. Its first product, Square Reader, was a dongle that let users process credit card payments on smartphones. The Square Stand then converted iPads into complete point-of-sale systems, while the Square Register developed that design into a stand-alone POS system.
Square's solutions are cheaper than traditional POS systems, and they deliver data to the cloud, which helps vendors analyze their purchases and business trends.
Square is also expanding that ecosystem with new services like its peer-to-peer payments platform Square Cash (which is integrated with Snap's (NYSE: SNAP) Snapchat and offers Bitcoin trading), its restaurant delivery and catering services Caviar and Zesty, and Square Capital, which offers financing for Square merchants. It also recently acquired Weebly, a website creation platform that enables users to integrate e-commerce features.
But that's not all -- Square is expanding into the payroll, customer relationship management, and inventory management markets with various add-on services. Simply put, Square is gradually evolving into a one-stop shop for companies that want to streamline their payments and digitize their businesses.
2. Surging demand for Square's streamlined solutions
Demand for Square's services has been robust. Its gross payment volume (GPV) rose 31% annually to $17.8 billion during the first quarter, matching its growth rate in the fourth quarter.
Square initially carved out a niche with smaller businesses, but larger businesses are starting to use its services. Sellers processing over $500,000 in GPV accounted for 20% of its total GPV during the quarter, compared to 13% in the prior year quarter. Sellers processing less than $125,000 accounted for 53% of its GPV, down from 61% a year earlier.
That growth boosted Square's total adjusted revenues by 51% annually to $307 million during the first quarter, beating estimates by nearly $14 million and marking an acceleration from its 47% growth in the fourth quarter.
Looking ahead, Square expects its adjusted revenues to rise 49% annually at the midpoint for the current quarter, and for its full-year adjusted revenues to climb 44% -- compared to its prior forecast for 34% growth.
3. Improving profitability
Square is unprofitable on a GAAP basis, but its non-GAAP profitability is improving. Its adjusted EBITDA rose 33% annually to $36 million, and it posted non-GAAP earnings of $0.06 per share, which topped estimates by a penny and marked a significant improvement from its loss of $0.04 per share a year earlier.
Square expects that momentum to continue througout the rest of 2018. For the second quarter, it expects its adjusted EBITDA to rise 72% at the midpoint, and for its adjusted earnings to grow 43%. For the full year, it expects its adjusted EBITDA to rise 76% at the midpoint, and for its adjusted earnings to climb 70%.
Square Stand. Image source: Square.
At $45 and 98 times this year's earnings, Square's stock might seem pricey. But if it can keep growing its earnings as it narrows its GAAP-adjusted losses, its multiples should contract as the stock rises.
4. A strong competitive position
Lastly, Square has a first mover's advantage in the mobile and cloud-based POS space, and it doesn't have much direct competition. Oracle (NYSE: ORCL), which purchased POS giant Micros Systems in 2014, could be considered an indirect rival, but Micros' traditional systems are directly in the blast zone of Square's newer solutions.
A more direct rival is PayPal (NASDAQ: PYPL). PayPal's Venmo competes against Square Cash, while PayPal Here counters Square's mobile POS solutions. However, Square's rapid growth indicates that there's probably plenty of room for both next-gen payment companies to flourish.
The key takeaway
Square isn't a stock for queasy investors, but I think investors who accumulate this stock on these dips could be well rewarded. The traditional POS market is still ripe for disruption, and Square's expanding digital ecosystem could make it an enterprise powerhouse in the future.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends PayPal Holdings. The Motley Fool owns shares of Oracle and Square and has the following options: short June 2018 $52 calls on Oracle and long January 2020 $30 calls on Oracle. The Motley Fool has a disclosure policy.
