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Is SQ Stock Ready to Bounce Back?

Theodore Kim

Square (NYSE:SQ), the San Francisco based payment processor, had been on a roll. Since its initial IPO in November 2015 with the SQ stock price at $58, investors who got in early rode the price up to over $101 in September 2018. Since then, however, it has been an all-downhill roller coaster.

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Square stock recently closed back down to the IPO price of $58, and may yet again test its all-time low of $49. The underlying technology for Square stock by all accounts is undoubtedly sound. The market may be cool on SQ stock, but customers like the service.

Square has steady increased top-line revenues every year. In fact, from the pre-IPO days of the creation of Square by Twitter (NYSE:TWTR) founder Jack Dorsey back in 2011, revenues have increased more than 15-fold. However, Square stock has yet to generate positive net income.

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As the hard-pressed investors of Uber (NASDAQ:UBER) stock know all too well, dazzling technology and great top-line revenue growth are all swell. But if there is no positive net income in sight and losses keep growing by staggering amounts, there is no reason to hold the stock.

Despite robust sales growth, just within days after reporting disappointing second-quarter earnings announced on Aug. 1st, Square stock dropped around 40%. Similarly, the shares of Visa (NYSE:V), MasterCard (NYSE:MA), and PayPal (NASDAQ:PYPL) – comparative payment processors – have also been struggling in the market.

When it comes to the tech sector nowadays, investors are getting tired of talk and want to see some beef on the bones in terms of bottom line earnings. Or they vote with their feet.

With the massive sell-off in SQ stock, will the bears finally back off?

Here are two reasons why Square is now becoming a great value play in the FinTech sector.

Free Stock Trades Will Drive New Revenues, Enhance SQ Valuation

According to a recent report in Bloomberg, Square is in the initial stages of testing a new feature allowing users of its Cash App service to buy and sell listed U.S. equities for free. A free stock trading functionality would put Square into direct competition with Robinhood, an online broker launched as a smartphone app in 2014.  Backed by the venture capital firm Sequoia Capital, Robinhood is valued at approximately $7.6 billion.

Many skeptics will wonder what the point is about spending heavily to launch and maintain a free service. As many analysts of the online brokerage wars know all too well, free stock trades are akin to a bar offering free salty peanuts to customers. After eating the free peanuts, those customers soon pony up the cash to buy expensive drinks. The trading of stocks may be free, but everything else comes at a price.

Robinhood, for example, will charge a premium for offering investors telephone advice, foreign stock transactions, interest on uninvested cash holdings, as well as interest on margin loans. Robinhood will also sell to a captive market other high margin financial products such as credit cards, insurance and auto loans. Similarly, for Square, offering users free stock trades will attract more users and drive more volume and thus revenues to their payment processing services.

Offering free stock trades will not be the first free service for Square. In their recent earnings statement, Square noted that they offer their existing Cash App clients peer-to-peer cash transfer service for free as a marketing tool to drive new business.


SQ Is Best in Class Infrastructure – And Getting Better

Mobile payments processing is still a nascent industry just at the beginning of growth. According to the consulting firm McKinsey, the global payments industry is a $1.9-trillion business. Much like Amazon (NASDAQ:AMZN) and Twitter in the early years, Square admittedly is less concerned with profitability and far more concerned with building their engineering platform to compete and win in the market against the giants of the financial services industry.

According to the most recent earnings release for the second quarter of 2019, product development expenses for Square stock were $174 million in the second quarter of 2019, up 52% year-over-year. This increase was driven primarily by costs related to engineering, data science, and technical design.

In short, Square is spending heavily on technology to out-build and beat the competition for the future of the industry.

Bottom Line on SQ Stock

There is certainly no shortage of deep-pocketed competitors in the payment processing business. In fact, recent months have seen Facebook (NASDAQ:FB) and JP Morgan Chase (NYSE:JPM) announce major new investments in their payment solutions offering.

Yet, Square stock has been showing a decent support level at the $50 to $52 range. Square stock represents a proven and solid value play in what is usually a risky and overvalued FinTech sector.

At the time of writing, Theodore Kim, CFA,  holds no position in any of the stocks mentioned above.

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