Admittedly, I’ve had my moments of not being a fan of Square (NYSE:SQ). I haven’t really been overly bearish on the name and have frequently felt there are better ways for investors to deploy their capital, particularly in the sectors in which the company participates. Square stock is higher by just around 15% so far this year.
Officially, the stock is classified as a technology name, but it’s a key component in some fintech exchange-traded funds and, let’s keep it real, Square provides financial services. This year, investors would be doing better with a basic technology or financial services ETF or index fund or a fintech ETF than they are doing with Square stock.
Don’t count me among the fully converted, not quite yet anyway, but there are plenty of reasons to believe Square could top its 2019 showing next year. Much of that thesis revolves around the expected growth of the domestic mobile payments industry, one that Square dominates.
The U.S. lags behind other markets in mobile payments adoption, but the landscape is booming, providing a potential tailwind to Square stock.
“According to the FDIC, cash represented just 30% of all payments in 2017. Furthermore, 68.7% of U.S. households had a credit card in 2017 vs. 63.8% in 2015,” notes Harvard University. “Business owners who recognize this trend are responding accordingly, with some opting to go entirely cashless in an effort to increase operating efficiency, reduce wait times for customers, and create a safer work environment by mitigating the risk of theft.”
A Stretch, but It Could Happen
What follows is speculation on my part, but a potential catalyst, for Square in 2020 could be the entrance of an activist investor. As has been widely noted, Square CEO Jack Dorsey is quirky and he pulls double duty with the fintech company and social media firm Twitter (NYSE:TWTR).
Last month, Dorsey took to Twitter to say he was considering a move to Africa for six months and no interim replacement was identified. It remains to be seen if Dorsey follows through on that proclamation, but it was enough fodder for Square bears to push the stock lower.
None of that is to say Dorsey is a volatile or ineffective leader. He’s neither, but an activist could sense opportunity with Square simply to bring some steadiness to the company, which could positively affect the shares.
As Harvard notes, activists generally search for undervalued or under-performing companies or those with assets that could be further monetized. Square isn’t cheap by traditional valuation metrics but has lagged the tech-heavy Nasdaq-100 Index and the S&P Financial Services Index over the past year.
Additionally, Square’s Cash App is a business that could prove alluring to an activist investor. Yes, Cash App is growing just fine on its own (it’s the most downloaded financial app and has a $500 million turnover run rate), but an outsider could bring some fresh perspective to the table and help Cash App reach new heights.
Obviously, the activist thesis is highly speculative and may not materialize, leaving Dorsey and team to engineer growth that justifies the rich multiples (69.4x 2020 earnings) at which Square stock resides.
The Bottom Line on Square Stock
Entering 2020, there remain a lot of moving parts to the Square thesis, but there are green shoots, too, including the company’s growing subscription base and increased prominence among high revenue businesses.
“We are pleased to see the company continue to move upmarket, with 27% of gross payment volume coming from sellers with over $500 thousand in annual payment volume, compared with 24% last year. Subscription and service-based revenue was up 82% year-over-year,” said Morningstar in a recent note. “To effectively scale, we think Square needs to build out its ancillary services and the strong subscription and service growth raises confidence that Square can achieve this.”
So the bottom line is Square is making plenty of moves on its own to bump the shares higher next year, but some outside assistance could help, too.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.
