In the time since its 2015 IPO, Square (NYSE: SQ) has evolved from essentially a payment-processing company to a financial services ecosystem for both small businesses and individuals that's one of the leaders in the war on cash. The company's payment processing hardware can be found in businesses all over the United States, its business lending program has helped small businesses with billions of dollars in liquidity, and its Cash App is actively used by 15 million people and counting. And it's the stock that at the top of my list as we head into September.
Although Square is up by 12% in 2019, the company is still nearly 40% off its all-time highs, despite some pretty encouraging growth in its business. Now could be a great time to buy Square before the market realizes just how much potential the company has.
Square has been revolutionary when it comes to small business payment processing. Image source: Getty Images.
Why has Square performed poorly?
There are a few reasons Square has underperformed over the past year or so. For one thing, CFO Sarah Friar left the company shortly after it reached its all-time high last year, and to put it mildly, Friar did an amazing job.
Another reason is growth concerns. Square's most recent guidance came in a bit below analysts' expectations, and when a stock is mainly priced based on its future potential, as Square is, this can always be a concern. And Square recently announced that it was selling its food-delivery platform Caviar, and investors seemed to be disappointed to hear the news.
The sky is the limit
Having said that, it's important to focus on Square's amazing growth story and even more amazing future potential.
Just to name a few stats, Square reported 46% year-over-year adjusted revenue growth in the second quarter, and its core payment processing business now has an annual run rate of more than $100 billion in gross payment volume. And since Square is just starting to tap into larger merchants as customers, this could still have tremendous room to grow -- after all, it represents just 0.2% of the $45 trillion in worldwide card payment volume that's expected by 2023.
Square Capital, the company's business lending platform, grew by 36% over the past year and has now produced more than $5 billion in loans. And Square's Cash App has soared in popularity on the individual-focused side of the business. The company's person-to-person payment platform generated $135 million in revenue during the second quarter -- this is an annualized run rate that's significantly higher than PayPal's (NASDAQ: PYPL) Venmo and is up from just $1 million in the same quarter in 2016.
Speaking of the Cash App, this could just be the tip of the iceberg. Square has previously said that it ultimately wants to be a provider of virtually any financial services its customers could need. This could mean savings and checking accounts, personal loans, an investment platform, and more. And the app has 15 million active users Square could cross-sell products like these to.
It's also worth pointing out that Square is a potential acquisition target. There are several tech giants who have fintech ambitions, and they have deep pockets. Under the right circumstances, I could see a company like Apple or Facebook buying Square. I don't particularly see this as the most likely outcome, but it's certainly a possibility worth noting.
A great way to add fintech to your portfolio
To be perfectly clear, I don't think Square's path to success (at least in terms of its stock price) will be straight up. Guidance will be adjusted from time to time, and like any company with such rapid growth, there's likely to be some turbulence along the way.
I have absolutely no idea where Square's stock price will be in six months, a year, or even a few years. However, I'm confident that I have a good idea of where it will be in five to 10 years down the road -- a lot higher than it trades for today.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Matthew Frankel, CFP owns shares of Apple and Square. The Motley Fool owns shares of and recommends Apple, Facebook, PayPal Holdings, and Square. The Motley Fool has the following options: short October 2019 $97 calls on PayPal Holdings, short January 2020 $155 calls on Apple, long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, long January 2020 $150 calls on Apple, and short September 2019 $70 puts on Square. The Motley Fool has a disclosure policy.
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