Over the past several years, Square (NYSE:SQ) has made a name for itself on both Main Street and Wall Street as a trusted payments processor that is at the heart of the cashless commerce revolution. This has propelled Square’s revenues to more than double over the past three years, which has in turn led to a more than six-fold increase in Square stock.
Over the next several years, the narrative will be slightly different, but the results will be the same.
Square has been gradually and successfully turning into a bank. The company has developed multiple financial tech services catered to small businesses, the sum of which have been adopted in bulk. More important, they are posing a threat to the traditional banking industry.
As Square continues to grow its banking operations alongside is payment processing business over the next several years, the company has an unique ability to be a dominant player in both industries.
Here’s the bull thesis. Major payments processors have $100 billion-plus market caps. So do major banks. Square has a market cap of just $30 billion.
Thus, while bears can pound on the table all they want about valuation, the big picture idea here is that you have a hyper-growth company attacking exceptionally large and valuable markets from a unique angle. Revenue growth is large. Margins are sky high. Earnings potential is enormous.
Overall, Square stock looks like it’s still in the early innings of a multi-year growth narrative. As this narrative plays out, Square stock will only head higher, making this stock a solid long term buy-and-hold.
Payments Processing Is a $100 Billion-Plus Opportunity
Before we jump into the banking side of Square, it’s necessary to understand that Square stock has huge upside in a long term window through payments processing alone.
Digital and card payments are the future. Gone are the days of cash and coins and here are the days of credit cards and e-payments. As an enabler of non-cash payments across multiple channels, Square is at the core of this transition.
They have a brick-and-mortar presence through Square machines that allow retailers of all shapes and sizes to affordably and easily process card payments. They have an online presence through Square software which does the same thing for e-payments. Recently, they extended into the mobile game sector and now have payment software that can be incorporated into apps.
Overall, everywhere the consumer is these days, Square is there, too, making it easier and more convenient than ever to buy and sell things.
This is a huge market. It essentially comprises the entire global consumer spend pool. That pool measured $28 trillion in 2010, projects to measure $40 trillion in 2020, and will likely surpass $50 trillion in a decade.
Square has a market cap of just $30 billion today. Granted, that market cap is because the company only controls about 0.2% of global consumer spend today. But that share has been rising over the past several years. It will continue to rise because Square is only expanding its omni-channel presence.
As such, over the next several years, Square’s market share should run up to 0.4%, 0.6%, 0.8%, 1%, so on and so forth.
From this perspective, Square projects to be a major player in the global payments processing market. Major players in this market include PayPal (NASDAQ:PYPL), Visa (NYSE:V), and Mastercard (NYSE:MA). All three of those companies have market caps over $100 billion. Thus, at $30 billion, Square stock has plenty of runway through payments processing alone.
Banking Is a $100 Billion Opportunity, Too
On the banking side of things, Square’s opportunity is just as large and arguably even larger.
Square has made some quietly aggressive and smart moves in the banking sector over the past several quarters. Namely, the company has developed and continually improved a suite of fintech services catered towards small to medium sized businesses in the U.S.
These services include things like Square Capital, Square Payroll, and Square Card. They are essentially the same services that a big bank would offer businesses. They are just offered by Square instead.
Square is winning this battle. Why? Because traditional banking is old, with old technology and old faces and names. Square is the exact opposite. It’s a new company, that is using new methods and new technology to create new solutions. They are new faces, new names, and new ideas.
It’s a classic case of out with the old, in with the new. That’s not to say big banks aren’t adapting. They are. They will remain in control of this market for the foreseeable future. But, if the company’s early successes in banking are a sign of anything, it is that Square will one day become a major player in this market.
Major players in this market all have $100 billion-plus market caps. Wells Fargo (NYSE:WFC) has a $230 billion market cap. JPMorgan (NYSE:JPM) is at $340 billion. Bank of America’s (NYSE:BAC) valuation hovers around $280 billion, while Citigroup (NYSE:C) is at $150 billion.
To reiterate for emphasis purposes, Square’s market cap is a fraction of all those market caps at just $30 billion.
As such, through expanded operations in the financial services sector, Square has a tremendous opportunity to grow into something much, much bigger.
Bottom Line on SQ Stock
Square stock has two $100 billion-plus opportunities in front of it in the payment processing and financial services sectors. More than that, the company is rapidly gaining ground in each sector and has visibility towards becoming a major player.
As such, with Square hovering around a $30 billion market cap, Square stock looks good here for big gains in the long run.
As of this writing, Luke Lango was long SQ, PYPL, and V.
