Square Inc (SQ) Stock Needs to Make Some Money

Square Inc. (NYSE:SQ) has never been a money-making proposition. Like many tech companies, net income has not been their thing, man. Growth has been their thing. Revenues rose from $552 million in 2013 to $1.267 billion two years later, and that record will likely be beaten when the company next reports on Jan. 31.

Square Inc (SQ) Stock Needs to Make Some Money

Analysts are expecting $451 million in revenue for the quarter, or $1.307 billion for the year. The whisper on losses, 8 cents per share, would bring total losses for the year to 46 cents. Square survives on hope and cash flow, which was slightly positive in 2015 and the third quarter of 2016. Its growth is slowing noticeably.

But what if, just for fun, Square did something wild, crazy, and in-line with what the rest of the payments industry does, and made a little money for shareholders?

The stock would take off. It would take off bigly.

How Square Stock Might Make Money

Square is not going to make a net profit as a processor. It’s not going to bypass exchange fees. Instead it’s going to become profitable as a platform, with a host of financial products attractive to its small business base.

As our James Brumley wrote this week these include Square Capital, whose loans have doubled over the last year. Square is also offering payroll services, inventory management and analytics to its small business customers.

This hope has sent SQ stock up 56% in the last six months, which sounds great until you take the chart out a few months, and see that stock hit another peak in April, 2015, which took it higher than the present price of $14.90. At that point, speculation on brighter days had pushed it to $15.13.

Who Wants SQ Stock?

Partly for that reason, our Tom Taulli has another reason to buy Square stock.

As takeout bait.

Square has a powerful brand (at least within its niche), it’s big in mobile, and there are a lot of big tech companies that aren’t in payments yet but might like a play there, like Microsoft Corporation (NASDAQ:MSFT).

That’s interesting, but if SQ stock were going to be taken out, the buyer would not likely come from that quarter. Processing is something a tech company can do for itself, if it’s interested in that low-margin business. There are easier ways to make money.

It’s more likely the buyer would come from the payments mainstream — processors like First Data Corp (NYSE:FDC), PayPal Holdings Inc (NASDAQ:PYPL) and Vantiv Inc (NASDAQ:VNTV). These companies understand just how complex processing merchant payments are, and what the capacity is worth. Wait a few years and maybe some banking organizations like JP Morgan Chase & Co. (NYSE:JPM) or Capital One Financial Corp. (NYSE:COF) might come calling.

A move by any of these players could set off a feeding frenzy in the industry, one that would deliver shareholders a premium well over its current $5.3 billion price.

That may be why a processor isn’t making such a move. SQ stock is already bigger, by market cap, than NCR Corporation (NYSE:NCR), which has been around since the 19th century.

The ancillary businesses may also be unattractive. It’s hard enough just processing payments.

A winning premium would also make Square unaffordable for a merchant processor outfit like Vantiv, worth $12.3 billion, and make the merchants payment outfit vulnerable to takeover by one of the banks that distribute cards and serve the customer side of the transaction. Maybe Intuit Inc. (NASDAQ:INTU) or American Express Company (NYSE:AXP) might be interested in upsetting the apple cart in that way, but again you’re talking about a less-profitable operation and, in the case of Intuit (worth $30.1 billion), a deal that could soak up a lot of its market cap.

A Speculation

There are many companies that could make a move on SQ stock, setting off a frenzy of merger activity in the payments space akin to what everyone keeps expecting will happen in media after Sumner Redstone dies and the sharks come for Viacom, Inc. (NASDAQ:VIAB).

But waiting for such a frenzy, betting on it with your money, is speculation. Square today is still a money-losing proposition in an industry where losing money is uncommon, and a company whose growth is slowing rapidly.

Go for it if you wish, but don’t hock the silver. This is a mad money play.

Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN, AAPL, MSFT and GOOGL.

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