Summary

• Square has key solutions for small business operations, especially for in-person transactions.
• Square’s competitive advantages can allow market share to grow.
• With a renewed focus, Square can overcome their weaknesses.

Square (SQ) first began as a company that enabled small and medium sized businesses to accept credit card payments on smartphones and other mobile devices. This turned what was normally cash or check transaction businesses (flea markets, food trucks/carts, farmer’s markets, plumbers, electricians, and other contractors) into higher-tech credit card accepting businesses. Square makes its money from transaction-based fees. 

The company added many services since its initial roll-out. CEO, Jack Dorsey, refers to their combination of services the ‘seller ecosystem‘. Square expanded offerings to provide sellers with multiple tools and solutions to help manage many aspects of their business in a combination of hardware and software.

Square’s hardware enables magnetic stripe, EMV chip, and tap-and-pay NFC transactions on mobile devices (smartphones/tablets). The readers accept cards from Visa (V), MasterCard (MA), American Express (AXP), and Discover (DFS). The company also offers Square Stand (to hold an iPad as a payment terminal), Square Register (hardware w/ 2 screens with point-of-sale software), Square Terminal (portable all-in-one payments device that enables tap, dip, and swipe transactions; prints receipts).

The company’s software includes a standard payments app and cloud-based solutions for tracking sales, customers, employees, and inventory. It also sends digital receipts and collects instant customer feedback. Square also offers services such as retail bar code scanning/inventory management, restaurant software (manages tables, orders, courses), online payment solutions, invoicing, Weebly web page building tools, customer loyalty tools, analytics, and payroll software.

Square also offers their Cash App, which enables individuals to send, spend, and store money. The Cash App also allows users to buy and sell bitcoin. 

source: Square Feb 2019 Investor Presentation

Strengths

Square has key strengths that differentiate the company from the competition. 

• Square has a complete collection of convenient, easy-to-use solutions for running businesses online and in-person. The company also offers loans to qualified sellers. 
• The company has the competitive advantage of having no monthly fees, no contracts, and no merchant service fees. This gives Square a price advantage over their close competitor, Shopify (SHOP) which has monthly fees. Sellers get Square’s basic credit card reader for free – they just pay transaction fees. 
• Square’s hardware is cheaper than Shopify’s hardware. 
• Square has above average revenue growth, which demonstrates their effectiveness in growing the business. 
• Square has a strong track record of exceeding revenue and earnings estimates for 12 consecutive quarters. 
• Intellectual Property: Square has a collection of patents to protect their technology. They also have protected trademarks, copyrights, logos, domain names (Square, Cash, Weebly). 

  Weaknesses

There are some internal weaknesses that have room for improvement. 

• Square’s high expenses have led to negative operating income. Product development costs are the highest portion of their operating expenses. This includes engineering, design, data science, supply costs, consulting fees, depreciation of infrastructure and tools (data center/computer equipment, software etc.), and other related costs. 
• The gross margin of 40.6% is lower than Shopify’s GM of 55.6%. 
• The company’s high operating expenses have led to negative ROE [return on equity) and ROIC (return on invested capital).
• Square is at risk of declining growth rates. The current high expected revenue growth rate of 43% for 2019 is expected to drop to about 35% for 2020, which is still impressive. However, it is not clear how long Square will be able to sustain high double-digit growth. Sharp declines in the expected growth rate could have a significant negative effect on the stock price. 
• The CEO, Jack Dorsey, also serves as the CEO of Twitter (TWTR). This may limit his time and attention for Square’s business. It may also be make potential investors cautious of investing in the stock. 
• Interest rate sensitivity: Square’s cash is held in cash deposits and money market funds. Since interest rates were recently lowered, it could have a negative effect on their cash returns. 

Opportunities

There are multiple opportunities to improve and expand the business.

• Expansion in existing markets: Continue to expand in the United States, Canada, Japan, Australia, and the United Kingdom where they currently operate. 
• Expansion in new regions: Explore new countries to move into for further international growth. There are many large countries such as Brazil, China and India that Square hasn’t even entered yet. However, keep in mind that China has a cap on transaction fees which is much lower than what Square charges. 

source: Square Feb 2019 Investor Presentation

• Partnerships with other companies: Square had a partnership with Whole Foods since 2014 where customers can make purchases at food venues within Whole Foods stores with the Square system. Square can secure other similar strategic partnerships to expand their business. 
• Increase sales to existing customers: As their customers expand, they may need to upgrade their sales transaction systems. This provides an opportunity for Square to up-sell to current customers. 
• Strategic acquisitions: Square is currently selling Caviar (restaurant delivery service). Square stated that they want to use this money to invest back into the Cash app. This could be an organic growth investment. It could also be an opportunity for an acquisition to increase growth within the Cash app business.

Threats

Square faces various potential external threats that could have negative consequences for their business.

• Competition is a potential threat: Shopify is Square’s closest competitor. The company also competes with PayPal (PYPL), Lightspeed, and traditional payment processing businesses. Increased competition and/or price wars from competitors could limit Square’s market share. 
• Government regulations such as new taxes or limits on transaction fees for payment processors or online transactions could have a negative effect on earnings.
• A high profile security breach could cause customers and potential customers to avoid using Square.
• Square’s three largest agreements with banks and transaction processors expire between Q1 2020 and Q3 2022. New agreements may not be as attractive as the current ones. 
• The company is at risk of economic slowdowns which could reduce demand for the company’s services and reduce the amount of transaction fees that Square collects. 

Long-Term Square Outlook

Square is in a great position to continue their expansion in current markets and in new untapped regions. The company has a strong opportunity to capitalize on the trend of more cashless transactions for businesses. Plenty of untapped markets exist internationally for further growth. 

Competition will something to keep an eye on. Currently, Square (with no monthly fees) has the advantage over Shopify. However, Shopify could change their pricing structure to challenge Square. Other companies could also challenge Square with similar pricing and services. 

With millions of businesses throughout the world and the shift to cashless payments continuing to grow, there is room for multiple players in the market. Therefore, Square has a good chance to thrive for multiple years with above average growth.