There’s no better analogy than Men in Black II for an effective way of describing how Square Inc (NYSE:SQ) is quietly but quickly positioning itself to become an even more disruptive force in the financial world. And why SQ stock is “The New Hotness.”
In the 2002 silly-sci-fi sequel, Will Smith’s character ‘J’ muses to Tommy Lee Jones character agent ‘K’ of their newly-upgraded, government issued car “What you remember is that you used to drive that old busted jawn. See, I drive the new hotness. Old and busted [pointing at agent K]. New hotness [pointing at himself]. It’s a memorable and funny quip.
Whereas its competitors are developing products, Square is putting itself in the small business person’s shoes and coming up with solutions. It matters. It may not be evident how or why yet, but this business mindset continues to make SQ stock a compelling investment prospect.
Square Thinks ‘Solutions’
It’s not too often a company’s given philosophy really matters to current and potential shareholders. At the end of the day, it’s really all about money; the rhetoric just makes for interesting story-telling.
In the case of Square though, the seemingly subtle differences between it and its rivals are actually quite significant.
You know the company, even if you don’t think you know the company. Square is the outfit that makes the little white squares that attach to a smartphone, turning into a credit card acceptance tool for many small businesses. The company doesn’t divulge how big its user base is, but educated guesses peg the figure at somewhere around one to two million.
It’s a solution many small businesses were looking for, but not offered by the likes of payment processors such as Global Payments Inc (NYSE:GPN) or credit card middleman like Visa Inc (NYSE:V). Either most small businesses are too small for those big companies to serve, or the cost of the platforms they offer simply cost too much for a mom-and-pop shop to utilize. Square saw an opportunity to use technology to achieve a meaningful degree of scale by catering to a mostly underserved small business market. The rest, as they say, is history. The SQ stock price is up more than 150% year-to-date as observers became believers.
As it turns out, however, Square isn’t anywhere close to being done provuding turnkey solutions that small enterprises need but can’t effectively get.
Case in point? It’s wading deeper into the small business lending market, starting with its credit-payment customers.
Small community banks are already crying foul at Square’s hope of garnering an industrial loan charter, claiming it gives the organization an unfair advantage over more regulated traditional banks. And truth be told, there’s a little validity to the argument.
It’s not the prospect of an ILC charter approval these banks are really upset about, however. It’s the way its loans are structured for borrowers that makes them so compelling. Not only will they be relatively small loans (an average of $6000 loans, which many banks wouldn’t even bother making) but also the principal and interest payments are a portion of the amount of payments processed using Square’s credit card readers. Few, if any, banks are willing to offer a business that kind of flexibility, even though flexibility like that is exactly what most small businesses need.
That’s not even the end of Square’s solutions-oriented products though.
In late October it announced an inventory syncing solution with BigCommerce, automating much of the time-consuming work that most sole proprietors don’t actually have time to do. Shortly after that, Square unveiled its very own cash register, with a price tag of only $1,000. The device not only helps a merchant manage inventory, it also manages employee schedules, analyzes sales trends and more. It’s a simple, robust turnkey solution that does what small businesses need done most, but struggle to do on their own when they’re forced to piece together solutions from various providers.
Again, simple solutions are better than simple products. Square has made a point of delivering the former rather than the latter.
Bottom Line for SQ Stock
Truth be told, Square isn’t doing anything its competitors couldn’t do as well. The difference is, Square is doing it while those other players aren’t. To that end, Square is so far ahead of its rivals, even if just in terms of name recognition and loyalty,it could be years before competitors catch up (and that assumes those other players are willing to rethink their entire business model).
In other words, Square is the “new hotness,” looking at the problems modern merchants and small business are facing today. Too many of its competitors are still trying to do business like it’s 1993.
That’s not to say SQ is a must-buy in the shadow of its triple-digit runup, but this is one of those cases where a corporate philosophy really does set the stage for fundamentally-driven higher highs.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.