With Square (NYSE:SQ) shares priced 91 times next year’s projected profits and 11 times its trailing 12-month revenue, SQ stock won’t be winning any value awards anytime soon. It’s simply too expensive, despite its stunning top- and bottom-line growth.
And yet, shares keep trekking higher, running from $24 a year ago to $72 now, with buyers ignoring the analyst consensus target of $68.75 that’s still in place.
What gives? Right or wrong, Square has turned itself into a story stock and a lifestyle company — a la Amazon.com (NASDAQ:AMZN) — that inspires investors to ignore fundamentals and focus on the importance of its ever-growing vertical and horizontal reach.
Much like Amazon, Square is poking its finger into a lot of pies, becoming a centerpiece of personal money management. Investors love the premise, even without realizing it.
Thinking Like a Customer
To be clear, no company even comes close to Amazon when it comes to becoming all things to all people. Groceries, entertainment, home management and a myriad of other consumer-minded services all lead spenders to Amazon.com one way or another.
Its reach has prompted investors to confuse size with fiscal success, making AMZN one of the most successful investments in history without the corresponding record-breaking profits to support the stock’s enormous gains.
Square is borrowing a page from that playbook, though, pre-solving problems that neither consumers nor small businesses knew they had.
Yes, the company’s roots were providing a simple, cost-effective means for small proprietors to accept credit cards. That’s still the core business, too. Square has become so much more than that, though.
Case in point: A year ago, Square unveiled its Cash Card, a prepaid debit card for anyone who wanted one. The feature added to the functionality of an actual, physical card to the company’s Cash App, which lets account holders receive, store and spend money just from one digital account.
Square’s card gives its customers the ease and familiar comfort of using actual plastic they can hold in their hand rather than force the use of a smartphone code to buy goods and services.
And that’s what they’re doing. In June, Square’s Cash Card holders used them to make $250 million worth of purchases. Each transaction puts a few pennies in Square’s coffers.
It’s not just ease of use for consumers that’s driving strong growth for Square, though. The company is also thinking about what its small business customers struggle with on a daily basis, coming up with solutions. One of those solutions is a platform called Caviar, aimed at restaurants.
Caviar, in simplest terms, is a tool that helps restaurants manage deliveries and handle phoned-in orders. Customers love it because it takes a big burden off their plate. Square loves it because it translates into recurring revenue.
Square’s small-business offerings extend beyond Caviar, however. Inventory-management tools and microloans are also available that just so happen to integrate nicely with the company’s point-of-sale hardware and its payment-processing service.
The common element of Square’s innovations? They’re all either mobile minded, allow for automation, or both.
It’s a very 21st-century kind of thing, even if most onlookers don’t realize it. Indeed, the average consumer has almost forgotten there was a time not that long ago when smartphones didn’t exist. There was a time not much longer before that when e-commerce wasn’t a thing. A great deal of work was done manually then, and little was offered in the way of real-time cash management.
That’s all changed and is still changing. But, Square has largely foreseen this paradigm shift and correctly predicted what consumers and small business would (and wouldn’t) want. Mostly, consumers and small proprietors just want buying and selling to work so well that they don’t even notice the process.
It’s a reflection of the digitally managed, automated lifestyle we’re enjoying in 2018 that wouldn’t have been possible just a few years prior.
Bottom Line for SQ Stock
Don’t misread the message. While Square has arguably faded into the background just as planned — where it can quietly thrive — competitors have taken notice.
PayPal (NASDAQ:PYPL) has added a physical debit card option to Venmo to counter Square’s Cash App debit card. Caviar competes with a platform called Xenial, from Global Payments (NYSE:GPN), which was built from the ground up as a restaurant-specific tool. Both of these alternatives, and others, pose a threat to Square’s growth potential.
But on balance, SQ stock owners can take some solace in knowing that Square is leading the charge on the innovation front by thinking proactively rather than reactively. It’s an edge that should keep Square in high-growth mode while its competitors stumble over their own size and hesitation.
But the rich valuation for SQ stock? Buckingham Research Group analyst Chris Brendler may have the most cogent take on the matter, recently noting, “While we still have some concerns about sharply rising expectations against a no-room-for-error valuation, we see no reason why SQ won’t continue to report better-than-expected core revenue growth into 2020.”
In other words, strong growth has overridden valuation concerns so far. Why would that stop being the case now?
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.