Since it’s IPO back in late 2015, Square Inc (NYSE:SQ) has had a rocky ride, but this has been the case with many newfangled offerings. Over the past year, SQ stock has still been able to log a return of 33%.
It certainly helps that the company has garnered support from Wall Street analysts. For example, Nomura has recently initiated coverage on Square stock, with a “buy” rating and a $17 price target.
But going forward, the real play for SQ stock is probably the buyout potential. Let’s face it, dealmaking has been heated during the past year.
With that in mind, what are the main reasons Square stock is so attractive?
SQ Stock M&A Reason No.1: Powerful Brand and Platform
Timing was spot-on for SQ. Keep in mind that the company launched in early 2009 when Apple Inc.’s (NASDAQ:AAPL) iPhone revolution was still in the early stages.
The breakthrough innovation, though, for Square was its reader. Attached to an iPhone, it allowed for the swiping of credit and debit cards. In other words, a merchant could do business anywhere or anytime.
And yes, growth was certainly strong. It was also important that one of the co-founders was Jack Dorsey — who also created Twitter Inc (NYSE:TWTR) — who leveraged his innate product capabilities.
So over the years, the pace of innovation has not slowed down. To this end, SQ has introduced features like one-or-two day deposits, analytics, inventory management, gift cards and invoicing. There is even a loan program for customers.
In the latest quarter, the revenues for Square jumped by 32% to $439 million and the loss came to a manageable 9 cents a share. There was also a 39% increase in transaction volume to $13.2 billion.
This was a pretty good performance since Starbucks Corporation (NASDAQ:SBUX) — a major customer of SQ — has been transiting to its own payment system.
SQ Stock M&A Reason No.2: Mobile Megatrend
The smartphone is rapidly becoming the virtual wallet for consumers. No doubt, this was evident during the holiday shopping season. On Cyber Monday, mobile commerce sales came to $1.19 billion, up 48% on a year-over-year basis.
Yes, growth seems like a good bet for the top players in the mobile commerce space. In fact, according to analysts from Instinet’s Dan Dolev, he forecasts that Squares’s transaction volume will hit a hefty $105 billion by 2020. As a result, he has a price target on SQ stock of $18.
It’s important to note that the company is still primarily in a small number of countries, such as Canada, Japan and Australia. In other words, there is tremendous potential for overseas expansion, which should help propel the growth for the long haul.
SQ Stock M&A Reason No.3: Many Mega Suitors
But when it comes to M&A, valuation is not necessarily the key factor. Instead, a suitor will often be willing to pay a premium for a company that has major strategic capabilities, such as a strong brand, sophisticated technologies or network effects. This is why Microsoft Corporation (NASDAQ:MSFT) was willing to shell out $26.2 billion for LinkedIn.
As for Square, it also has lots of strategic value. Let’s face it, the company has a powerful brand in the mobile commerce space as well as a top-notch platform.
And finally, there are no shortage of suitors that can pay top dollar for SQ, like Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG), Amazon.com, Inc. (NASDAQ:AMZN), MSFT and AAPL, just to name a few.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is a registered investment adviser representative (you can visit his site to learn more about his financial planning services). He is also the author of various books on investing like All About Commodities, All About Short Selling and High-Profit IPO Strategies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
