Square Inc. What do you see in this Square?
Square Inc. (SQ) holds a leading position in the digital financial services segment and operates in the markets of the USA, Canada, Europe, Japan, and Australia.
The company’s essential products include software and equipment for receiving and processing electronic payments. In recent years, Square has been actively developing its financial services for corporate and retail clients.
The issuer specializes in sellers’ business development solutions, offering tools for developing and hosting its websites, analytics and marketing, accounting calculations, and supply management.
The Corporation issues its debit cards and provides lending services for small and medium-sized businesses without the involvement of intermediaries in the face of traditional banks. Ensures high marginality due to cost savings and increases customers’ loyalty who receive the necessary services on a single platform.
Over the past two years, the average annual growth of the issuer’s revenue in this segment amounted to 23%, and gross profit increased by an average of 29%. At the same time, the share of large companies in Square’s revenue increased to 66% by the third quarter of 2021. TIn addition, the issuer actively promotes its brand in foreign markets.
This year, launched the most popular business solutions in the UK, Australia, and Canada. In September, the company entered the French market for the first time — the second-largest electronic payment in Europe. For individuals, Square offers a mobile Cash App. In 2020-2021, the average annual growth rates of revenue and gross profit in the consumer segment amounted to 179% and 104%, respectively.
The Cash App service was launched in 2015 and for money transfers. But in 2018, the application’s functionality expanded due to the opportunities to invest in stocks, ETFs, and bitcoin, after which the number of active users increased by 180%, exceeding 40 million.
Servicing transactions with cryptocurrency provided revenue growth in the consumer segment by 186% YoY for the first nine months of 2021. Digital currency services have become a new priority area of SQ’s business. In November, the company presented plans to develop its crypto wallet and decentralized exchange for crypto assets. $150 Square continues to expand its market presence through organic investments and M&A deals.
In October, the Cash App opened access for teenagers aged 13-17. Twenty million young Americans can become a new audience of the service. The company is also entering the fast-growing installment payments market (buy now, pay later – BNPL) due to the acquisition in August 2021 of the Australian fintech Afterpay, which occupies a leading position in this segment.
The deal will strengthen Square’s position in the e-commerce sector and expand its international presence due to 16 million customers and 98 thousand retailers served by Afterpay in the USA, Australia, France, and Italy.
Square is ahead of its competitors in terms of business development. Over the past five years, Square’s average annual revenue growth has been 49.6%. In 2020, the company became one of the beneficiaries of the transition to non-cash payments and the expansion of the e-commerce market against the backdrop of the pandemic, increasing revenue by 101.5%, and continues to increase the volume of operations, having achieved 66 percent year-on-year growth in the last quarter.
Considering the company’s high accumulated base, we expect a slowdown in revenue growth to 86.5% by the end of 2021 and to 20-26% in 2022; however, we positively assess the prospects for further development of the SQ business.
Estimates, on the horizon until 2025, the global e-commerce market may increase by an average of 29% per year. The growth rate of the contactless payments market may average 20.6% per year. According to current multipliers, Square reinvests its profits in technology and development; therefore, it looks more expensive than industry analogs.
At the same time, the company has already achieved stable business profitability indicators: the ROE (return on equity) indicator is 25%, with an average value of 16% for fintech companies.
In addition, the Corporation is expanding its international presence and diversifying its business by introducing new products and technologies, creating drivers for long-term profit growth, and claiming the status of an independent online bank.
Our target price for SQ shares on the horizon of 12 months is $294. The growth potential from the current levels is more than 30%.
