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Bull of the Day: Square (SQ)
By: Zacks Investment Research | January 18, 2019

Square (SQ), the "fintech" disruptor and hero of small business owners everywhere, just launched its in-app payments software development kit (SDK), which will enable sellers to process payments with Square through their own mobile apps.

Here's how the company described the new offering in a January 9 press release...

"With just a few lines of code, developers can easily and professionally build a fully PCI compliant, secure, and elegant Square-powered payments flow in their Android or iOS apps. With this SDK, developers leave the complexity of payments to Square and focus instead on providing a delightful buyer experience."

The in-app payments software will aid buyers in securely making payment for goods purchased online, using their credit or debit cards and digital wallets including Apple (AAPL) Pay and Google (GOOGL) Pay.


The new software can also be customized per developers’ need and will assist buyers to make seamless transactions. Notably, the new solution is expected to gain momentum with developers and sellers as it will enable them to manage online and offline payments on a single unified platform.

Square Emerges as an Omnichannel Payment Platform

Now offering first-party payment solutions in stores, online, and in mobile apps, the company says it's the only platform delivering solutions across all three channels.

While some competitors might challenge that assertion, Square innovations for small business are definitely expanding its presence in the digital payment solutions space and the company differentiates itself by offering a comprehensive payment platform, which enables sellers to combine software, hardware and payments services from various vendors.

An omnichannel payment solution enables sellers and developers to accept payments in multiple ways through one processing company. This aids in curtailing the complexity and security of managing payments across different channels.


And omnichannel buyers spend 50% to 300% more than shoppers who use a single channel. Notably, a single unified system also garners in-depth information about buying patters and enhances customer loyalty.

E-commerce Drives Innovation and Competition

From a simple idea to offer entrepreneurs a way to accept credit card payments using their mobile devices, Square has expanded and evolved into a thriving ecosystem of financial management for the small business person. The variety and uses of sales and accounting information tools is only expected to grow in the era of cloud-based data apps.

Just this week, Square launched a free debit card for business, with sellers immediate access to funds. The launch of Square Card, a free business debit Mastercard that helps businesses manage their cash flow by eliminating the time between making a sale and having the funds available to spend, will only further embed the ecosystem for entrepreneurs.

And the total addressable market (TAM) for transactions is enormous. Global retail sales from e-commerce are expected to hit $1.7 trillion in 2018 and $2.5 trillion in 2022 at a CAGR of 9.6% between 2018 and 2022. While China dominates this flow, the US is expected to top $600 billion in e-commerce sales by 2020.

Currently Square has only 3% of the U.S. payment volume TAM. And competition is heated.

Pursuing that TAM, Square has many seasoned competitors and is vulnerable to changing technology, industry standards and regulation. PayPal's (PYPL ) acquisition of Venmo continues to bolster its stake in mobile payments with an application that enables the transfer of money between family and friends via mobile devices. In third-quarter 2018, the app processed $17 billion of payments, up 78% year over year.

And also this week, we saw a $22 billion merger of two other competitors, Fiserv FSIV and First Data (FDC), whose Clover point-of-sale payment platform is expected to challenge Square in some aspects. The all-stock deal was described by the Wall Street Journal as "combining two companies that, though largely unknown to consumers, provide much of the financial technology that connects Wall Street to Main Street."

But analysts at KeyBanc see no material payment industry shifts from the Fiserv, First Data deal. Analyst Josh Beck argued that a robust digital-first brand and large TAM should insulate Square from perceived headwinds. He reiterated his $115 price target on Square shares, the highest target on the Street.

Buy for Ecosystem Growth Into a Large TAM

Square is expected to grow EPS by 70% for fiscal 2018 to $0.46. And this year is projected to witness a 52% advance to $0.70, for a lofty P/E near 100X again after the stock's 30% rally off the December lows near $52.

But for analysts and investors like KeyBanc, valuation isn't an issue. Right now, it's all about the ecosystem evolution and adoption. And this year's projected 34% revenue growth to $4.4 billion confirms the value of the Square ecosystem.

Disclosure: I own SQ shares for the Zacks TAZR portfolio.

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