I’m not fond of Square Inc (NYSE:SQ) as far its stock goes. It does have a nifty business and product, but one needs much more than that before putting one’s hard-earned money to work as an investment.
Financial services in general, and fintech specifically, are looking like bright places to invest for 2017.
We are moving away from the interpersonal methods of financial transactions and well on our way to doing everything electronically. Square stock, too, is on its way to providing such electronic services.
Of course, Square Register is the product we are most familiar with, but the company has plenty to offer as far as analytics, instant deposit, the ability to turn an iPad into a POS terminal, a peer-to-peer payments service, and my favorite, Square Capital, which provides merchant cash advances.
What to Like About Square Stock
Square stock has a few things going for it beyond this: Larger sellers seem to like the products, as 43% of payment volume now comes from these customers — a 600 basis point increase from the previous year. Because profit margins for larger sellers are the same as for smaller sellers, that means income per device is higher, and that means fewer devices have to be made. These economies of scale are great for a business like SQ.
Square stock can also benefit from the fact that all of Square’s products aren’t simply stand-alone items. The whole point is that the more broad a business is, the more of its services it can sign onto.
As mentioned, I love the merchant cash advance business. This is a high-margin business operating in a fragmented sector. The trick is underwriting. If Square gets a handle on this, it could make a ton of money. If not, losses could wreck the balance sheet.
SQ Stock Hurdles
There is, however, some major downside to Square stock: There’s tons of competition in payment processing, and that means having to square off (ha-ha) with the likes of PayPal Holdings Inc (NASDAQ:PYPL) and even Intuit Inc. (NASDAQ:INTU). When it comes to payment volume, Square is rather impressive in its $13 billion or so in the last quarter. But Paypal has about 6.5 times that amount.
I don’t like that SQ stock got involved with Caviar, a food delivery service. That’s “di-worse-ification,” to use Peter Lynch’s term. Management needs to be more careful in its synergistic efforts.
The biggest challenge is the same thing that faces all tech companies, even those in financial services. Things are moving very rapidly in tech, as well as in financial services. That means SQ has to invest in R&D, and sell the heck out of its products to keep pace with those big competitors.