One of the best stories on Wall Street these days is Square (NYSE:SQ) the payment processing company best known for its plastic dongles that are used by small businesses to process credit card sales. Square stock is up more than 65% year to date.
That’s light years better than the S&P 500 index, which shows a 7% year-to-date loss, and it trounces the performance of the Dow Jones Industrial Average, which shows a loss of more than 12% so far this year.
When I last looked at SQ stock in January, it was underperforming but had loads of potential. I called it a fintech winner in the fast-changing payments space, and Square rewarded my optimism.
I’m standing by that call. In fact, here are three reasons why I think SQ stock remains a buy right now.
1. The Future of Commerce and Square Stock
Square does a great job of catering to how people use money these days. Even before the novel coronavirus broke out, people were using cash less and credit or debit cards more often.
A Federal Reserve study showed consumers’ use of cash in transactions fell from 30% in 2017 to 26% in 2018. At the same time, the use of credit and debit cards increased from 49% to 51%.
Then came Covid-19. Remember, paper money already carries more germs than a household toilet. And the idea of handling germ-ridden currency – and then physically handing it to someone else or accepting money from them and all the germs that come with it – isn’t so appealing.
There’s already a global impact. More than 60% of respondents surveyed in Canada report using cash and ATMs less frequently. In the U.K., ATM transaction volumes are down 62%.
Harvard economist Kenneth Rogoff told Politico that the pandemic will push people toward credit and debit cards.
“Do I want to grab the thing that you were just holding in your hand? No.” he said.
That’s where Square comes in. Consumers can swipe their cards or push them into the chip reader without even making contact with the Square dongle. The operator never even has to touch the credit or debit card, making it a completely touchless transaction.
2. The Cash App Is Huge for SQ Stock
I’m really high on Square’s Cash App, which is the company’s competitor to PayPal’s (NASDAQ:PYPL) popular Venmo service. Revenue for the Cash App rose nearly $200% to $528 million. Those are huge numbers.
At least some of that was due to Cash App customers getting their income tax refunds and CARES Act stimulus payments via direct deposit. Square says the federal money sitting in those accounts resulted in a corresponding rise in spending and peer-to-peer payments.
Cash App includes the Square Cash Card, which not only operates as a debit card but also allows people to trade bitcoin and stocks. Bitcoin transactions gave Square $306 million in revenue in the last quarter, an increase from $65.5 million a year ago.
The company also has Square Register, Square Payroll and Square Capital, all of which give it the tools it needs to handle both business and personal finance.
Square also has the approval to open its own bank, which will allow it to offer personal and business banking services.
3. Square Is Back in the Food Delivery Business
In the age of the coronavirus and restaurants that can’t seat people indoors, food delivery is becoming a bigger business. DoorDash, Grubhub (NYSE:GRUB), Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT) are among those that bring food to consumers for a charge.
A year ago, Square sold its own food delivery business, Caviar, to DoorDash. But now its back with a new effort. Square began its on-demand food delivery service last week, exclusively to its restaurant partners that offer delivery.
Why does Square have a chance? For one, it should be able to negotiate better pricing for restaurants. Square is charging $1.50 per order plus the courier rate, with the idea that it can leverage having a network of restaurants to negotiate a better rate with DoorDash, Grubhub and other couriers.
And second, according to Motley Fool, Square is able to use its existing networks to build and manage its network of restaurants. That means it has a built-in client base and very little in the way of startup costs.
The Bottom Line on Square Stock
I don’t expect another 60% run-up in stock price for Square in the next six months, but I am bullish on the stock. Square has a dynamic CEO in Jack Dorsey and offers a product that is going to be a necessity for businesses doing point-of-sale transactions for the next several years.
SQ stock is a solid buy.
Patrick Sanders is a freelance writer and editor in Maryland, and from 2015 to 2019 was head of the investment advice section at U.S. News & World Report. Follow him on Twitter at @1patricksanders. As of this writing, he did not hold a position in any of the aforementioned securities.
