Since reaching about $45 in March, Square (NYSE:SQ) has been on a huge bull run. Note that Square stock closed on Friday at $235, while its market capitalization is $106 billion.
Now the Covid-19 pandemic did have an averse impact on the company’s POS (Point-of-Service) business as restaurants and retailers came under pressure. But this has been more than offset by other growth drivers, such as its Cash App. The fact is that Square has built a diverse and innovative platform. The company has also quite adeptly adjusted to market conditions.
In its latest reported quarter, Square stated that its sales soared 140% year-over-year to $1.27 billion and its earnings per share, excluding certain items, jumped 36% YOY to 25 cents per share. As for the Cash App, its gross profit soared 212%. The company’s overseas business also grew rapidly.
But the company’s decision to enter the online-tax preparation business did not get as much attention as it should have. And that business could be a nice, long-term, positive catalyst for Square stock.
Let’s see why that’s the case.
Tax Opportunity
In late November, Square agreed to pay $50 million for Credit Karma’s tax business. The deal was primarily driven by antitrust concerns in the wake of Intuit’s (NASDAQ:INTU) acquisition of Credit Karma. Of course, Intuit is the owner of the mega tax-preparation platform, TurboTax.
Credit Karma’s tax business is relatively small, as more than two million people have filed their taxes with the system. But reviewers have been upbeat about its ease-of-use. On Apple’s (NASDAQ:AAPL) iTunes appstore, the Credit Karma app has an impressive rating of 4.9.
As for Square, it is likely to distribute the service much more widely. And that will be done via the Cash App, which has more than 30 million monthly active customers.
True, the tax service is likely to be provided for free. But that is fine. After all, it is likely to attract many new users to Square’s other services, including its payments and debit cards.
But Square could offer premium versions of the tax service for business users, who have more sophisticated requirements. There could also be special versions for investors, those in the real estate business and so on. These offerings would provide Square with recurring revenues.
In the U.S., the market opportunity for online tax preparation is massive. Keep in mind that about 80 million taxpayers use electronic systems.
To put things into perspective, TurboTax is a massive business for Intuit. The product generates annual revenue of over $3 billion, and about 43 million customers use it.
The Bottom Line on Square Stock
When it comes to Square, there are certainly risks. First of all, the company’s competition is getting more intense. Square not only has to fend off up-and-coming fintech startups, but also old-line operators like PayPal (NASDAQ:PYPL). Even traditional banks – like Bank of America (NYSE:BAC) and JPMorgan (NYSE:JPM) — offer better platforms.
And Square stock is far from cheap. Consider that the shares are trading at about 350 times the company’s earnings!
But despite all that, Square is still in a strong position. There is a non-cyclical, global trend towards digital payments, whose value is estimated at a staggering $100 trillion. And the Cash App is one of the best tools on the market. Further, Square is also adding new businesses, such as tax preparation, to the platform. These businesses could nicely boost the company’s growth in coming years.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the author of courses on topics like the Python language and COBOL.
