Square Inc (NYSE:SQ), the Jack Dorsey-run company that is not Twitter Inc (NYSE:TWTR), is having a moment. Launched in 2010 with a card reader and software that could be used on a mobile phone, with a one-size pricing plan that was attractive to the smallest merchants, like food trucks and fair booths, SQ got early capital support from Starbucks Corporation (NASDAQ:SBUX) and seemed to be on its way when Square stock came public last November.
However, since its first trade at $13, SQ stock has seen that as a price ceiling. Spikes earlier this year toward $16 per share were quickly repelled, and it was trading below $10 just last month.
Even at those low prices, the company was selling at over three times its annual revenue, said the bears: SQ has no earnings.
But suddenly, this month, Square stock is one of the hottest stocks on the board.
A Sudden Turnaround for Square Stock
It began early this month with earnings that were not half bad. A net loss of $27 million on revenues of $439 million far exceeded analyst expectations, and payment volumes through the system were up 42% year-over-year, to $12.5 billion, with most of the gain driven by larger companies.
Square Capital, the company’s lending arm, did over 34,000 loans, worth $189 million, a 123% increase year-over-year.
A deal to handle processing for SBUX, formed in 2012, but ended last year amid heavy losses, was reportedly being renegotiated. Starbucks had been an early investor in Square.
This was followed by former hedge fund manager Steven Cohen, now with Point72 Asset Management, announcing he has taken 5.4% of the company, becoming its third-largest shareholder with 6.7 million shares.
Suddenly, it seems Square stock is flashing a buy signal to analysts, who are upgrading it; it seems to be ramping up in Europe and even Kanye West likes it.
SQ stock was up 4% in pre-market trading on Aug. 23 amid more analyst upgrades.
Two things seem to be happening.
First, Square has abandoned its one-size-fits-all pricing policy, which took 2.75% of transaction volumes in fees. Its website now advertises “custom plans” for merchants with annual sales as low as $250,000 per year and it is negotiating even lower rates with larger companies. SQ calls such companies “merchants” as opposed to “sellers” and, when it brings its impressive data analytics with it, the company can offer a compelling case against other transaction processors.
Second, Square Capital. Making loans based on knowledge of a business’ transaction volumes can be a very high-margin business, and the company already has millions of very small businesses using it, because its system is so easy to use. Square Capital looks like it will be a primary profit driver for the company.
Bottom Line on SQ Stock
By being flexible with larger merchants, and offering profitable loan services to smaller merchants, Square stock has quickly transformed from a cold stock to a hot one.
The question now becomes whether SQ can keep its lead, now that other processors and banks know its secret.
My guess is that Square stock can, at least long enough to sell out to one of them.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.
