Questions about how investors should approach Twitter CEO Jack Dorsey’s mobile payments firm Square [SQ] with respect to their portfolio allocations arose after the company reported disappointing second-quarter results in early August and worse-than-expected guidance for the third quarter.
Since the results, Square’s share price has slumped by over 20% to around $62. How should investors react?
The case to buy Square's share price
Some analysts strongly embrace the Square growth story and think its healthy fundamentals leave it on course to hit $100 (which would represent 61.8% on the current share price).
David Jagielski of the Motley Fool said there is “no better time to buy the shares than right now”. He urges investors to remember that Square beat earnings and revenue expectations for the second quarter, and that its sale of food delivery service Caviar for $410m represented a handsome profit, considering Square paid only $44.3m for it five years ago.
It means Square can now give full focus to its core and “simple” business, which allows merchants and vendors to take credit card payments using its small hardware devices and software. Jagielski calls it an “easy sell”, as Square’s kit compares favourably to the hundreds of dollars a month needed to pay for credit card terminals.
“Square effectively undercuts those fees by a vast margin with its cheaper terminals that are mobile and easy to move,” Jagielski added.
Indeed, Sqaure posted an 87% year-on year rise in second-quarter subscription and services-based revenues.
In addition, its peer-to-peer mobile app, Cash App, hit $260m in net revenues. It allows people to transfer money to friends, family or co-workers instantly, and is no doubt attracting millennials and students eager to “square up” for last night’s pizza or concert ticket.
“Square effectively undercuts those fees by a vast margin with its cheaper terminals that are mobile and easy to move” - David Jagielski of the Motley Fool
Barclays analyst Ramsey El-Assal thinks there is more development ahead too. "We believe Square has longer-term plans to make the Cash app a more robust financial services platform,” he said.
For other positives, investors should look again at the revenue growth of 44% in the quarter, and the stock’s earnings per share of -0.13, measuring its EPS growth this year at 43%.
It is a stock motoring forward as the company is poised to tap into the rise of global entrepreneurship, especially among the budding entrepreneurs of Generation Z. It is also a stock that has no geographical boundaries. “There are markets all over the world that Square could potentially tap into, and the growth runway has no end,” said Jagielski. “Consider that Visa generates more than $5bn in sales in just one quarter.”
Indeed, according to The Nilson Report, which publishes news and analysis about the global card and mobile payment industry, global card payment volumes will exceed $78 trillion by 2027. Square could get a healthy slice of that.
The case not to buy Square's share price
Investors might also consider following in the footsteps of Danish brand Joe & The Juice, which has ditched Square as its payment processing provider, according to Morgan Stanley.
Morgan Stanley analyst James Faucette wrote in a note that while Joe & The Juice’s revenue contribution was “relatively immaterial” for Square, it reflects negatively on its ability to attract and keep large customers.
"As Square enters this market, it is not only competing on price, but also on hardware capabilities and breadth of offerings," Faucette said.
“As Square enters this market, it is not only competing on price, but also on hardware capabilities and breadth of offerings” - Warby Parker co-CEO Neil Blumenthal
He added that there were indications that Joe & The Juice had moved to Square’s competitor, Adyen, to gain a single global processor across all its international markets.
“That suggests Square is still in the early days of developing its brand power in global markets and is less likely to offer a competitive advantage internationally,” Faucette said.
There is a concern that other large customers will follow Joe & The Juice’s lead and seek out Square’s competitors. Macroeconomic volatility amid Brexit uncertainty and US-Chinese trade tensions could also make small and medium-sized enterprises (SMEs) tighten their purse strings, rather than invest in new kit.
|Return on Equity (TTM)||-4.72%|
Square share price vitals, Yahoo finance, 2 September 2019
Square’s Cash App may be an exciting new service for millennials and Generation Z, but its association with bitcoin could be a harder sell for older customers. Moreover, with Caviar now having been sold, the move could seem more like an entrenchment than a refocusing.
Will Square ever have the scale and necessary ambition to compete with bigger players such as Worldpay and Global Payments as it matures?
Its revenue growth has slowed to 59% year-on-year in the first quarter of 2019, from 64% in the fourth quarter of 2018 and 68% in the third quarter of 2018.
In addition, even though Square’s share price has climbed by over 10% so far this year, it is down by 32% over the last 12 months. Indeed, it sat at $99 in September 2018. That either signals a risky buying opportunity, or a stock stuck in reverse.